The Federal Reserve Board cut short term interest rates by .25% yesterday and made it known they would NOT be cutting short term rates FOUR more times in 2025. This reversed what the Fed previously stated a few months ago regarding the pace of rate cuts.
Per our previous commentary just a few days ago, we addressed the importance of interest rate levels on asset valuations. There are a lot of moving parts in the day-to-day market trading dynamics. Simply put, people who trade stocks frequently all reached the conclusion that the elimination of the outlook for FOUR interest rate cuts in 2025 was just cause for initiating transactions on the sell side. Accordingly, “Sell at the Market” orders flooded the brokerage firm’s equity trading desks yesterday afternoon. Dealer bids accommodating normal levels of sell orders fell precipitously, and the result was the worst day for stock prices since August of this year.
What does this mean to the astute investor?
The short answer is…..not much other than prices are lower today than they were yesterday. This is good news for would be buyers today, and not so good for people who must sell TODAY.
Let’s cut to the chase. The Federal Reserve Board had no business forecasting FOUR interest rate cuts in 2025 after already saying they were planning for two cuts in late 2024 earlier this fall. Why the Fed chose to make such an outlandish prediction is subject to debate.
In our opinion, the shift from the Fed forecasting FOUR rate cuts to forecasting only TWO rate cuts is a step in the right direction. However, the Fed would be far better off not saying anything about future actions except, “We will keep looking at the data coming in every day and take action in the future accordingly.” Any other prediction by the Fed is merely a sign that people who are mostly based in Washington D.C. are trying to predict the unknown.
We also addressed the topic of “inflation” in the preceding commentary on this site. Those comments are more relevant than ever given the Fed’s senseless gyrations. Our inflation commentary is located right below on this web page. It might be worth a read, if you want to tie all this together.
The point we are trying to make is simple. America is starving for supply side economic policies that encourage work and domestic productivity. We need more products and services available. And further, the prospects for real reform of the reckless spending habits of our federal government represent the most promising policy shift we have seen in several decades. We will see if this comes to pass. Talk is cheap.
A couple of questions should be addressed.
Was the market meltdown yesterday a harbinger of things to come?
Was the jump in the rate on the ten-year U.S. Treasury note to its highest level since July 1st an indication of higher inflation returning, or merely a forecast of higher economic growth?
Higher growth would be welcome, while higher inflation would be most unwelcome.
Which is it?
The passage of time and the arrival of more data points will tell if yesterday’s market action is a signal of either possibility. Without meaningful reforms in Washington on spending and strong supply side economic policies, we could easily see a resurgence of inflation coupled with even more stagnant growth rates.
However, with energy prices falling, we have already seen counter-inflationary forces get well underway over the last six weeks, which will lower costs across the board for consumers.
Let’s take a rational approach to these discussions in terms of how they affect the bottom line.
In the equity markets, the companies we liked yesterday are offered to us today at lower prices. What the Fed does is of little consequence to a powerful company with a solid growth rate and strong financial characteristics. In the end, which companies you invest in matters much more than your “feelings” about the short-term outlook for the stock market.
For fixed income investors with laddered maturity schedules in place, higher rates mean higher interest income. While lower rates tend to mean higher asset valuations across the board.
If you are one of those rare people who think you already know where interest rates are going, you are much smarter than we are. Since we are NOT comfortable trying to predict rates, we use laddered maturities to cushion our fixed income holdings from rate changes in either direction.
We will be using our cash reserves to buy stocks and bonds into yesterday’s selloff. It’s like an early Christmas present.
Merry Christmas and best wishes for a Happy, Healthy, and Prosperous 2025!
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