Fed’s Rate Cut: What It Means for the Economy and Investors

by Jim Nelson of Euro Pacific Capital, 9/26/24

On September 18, 2024, the Federal Reserve cut interest rates by 0.5%, bringing the federal funds rate down to a range of 4.75% to 5%. This move, aimed at managing inflationary pressures while addressing the gradual rise in unemployment, underscores the Fed’s balancing act between fostering economic growth and taming inflation. While economic activity remains robust, the Fed acknowledges ongoing risks and stands ready to adjust policy based on future data. The goal remains clear: stabilize inflation around 2% and maintain maximum employment.

The Fiscal Landscape: Growth at a Cost

While the Fed is easing monetary policy, the bigger story lies in fiscal policy. Government spending is accelerating, and neither presidential candidate has signaled an urgency to balance the budget. This fiscal expansion is propping up economic growth but is also feeding into the already ballooning federal deficit. High interest rates, combined with persistent government spending, continue to push the deficit higher. As we’ve noted in previous updates, fiscal policy now has a more direct influence on inflation than monetary measures.

On the consumer front, households remain financially secure, largely insulated from rising interest rates due to fixed-rate mortgages. This financial stability has allowed them to keep spending, further bolstering the economy despite the Fed’s tightening cycle.

Outlook: Steady Economy, Volatile Markets

Although the Fed’s rate cut addresses economic uncertainties, its immediate impact may be limited. The broader economy is on solid footing, with the labor market remaining resilient despite some softening. Corporate profits are up 8% year-over-year, and Leading Economic Indicators (LEI) suggest the economy is stabilizing after recent dips.

However, markets might not experience the same calm. The Fed’s move was largely anticipated and priced in, but with valuations and investor sentiment hovering near previous peaks, we could see increased short-term volatility.