Highlights from the past week
It is Federal Reserve “rate cut” Day!
We wanted to send a note to our clients before the Federal Reserve makes its 2pm decision wherein most market participants expect it to decrease rates by 25 basis points. We wanted to provide you with a little context (and hopefully some understanding) as to understanding why President Trump and others have been pressuring the Fed to decrease rates and what we should expect. We hope you enjoy the read. For starters, lets think of the economy as a car. The Federal Reserve, or “the Fed,” is the driver, and their job is to keep the car going at a good, steady speed—not too fast, not too slow. They have two main goals, which we call their “dual mandate”:- Stable Prices: This means keeping inflation in check. If the car goes too fast (the economy overheats), prices for things like food and gas go up too quickly, and your money doesn’t buy as much. This is what we had seen in the summer of 2022, when the inflation got up to as high as 9%.
- Maximum Employment: This means having as many people as possible working. If the car goes too slow (the economy is sluggish), people can lose their jobs.
- Raising the rate is like hitting the brakes. It makes it more expensive for banks to borrow money, which means they, in turn, charge higher interest rates on loans for things like mortgages, car loans, and business investments. This slows down borrowing and spending, which helps to cool down an overheating economy and fight inflation.
- Lowering the rate is like hitting the gas. It makes it cheaper for banks to borrow, and those lower costs get passed on to consumers and businesses. This encourages people to borrow and spend more, which can give a struggling economy a boost.
- The job market is weakening. We’ve seen a number of reports showing that the number of new jobs being created each month has slowed down significantly. In fact, some of the past jobs numbers have even been revised downward, which is a sign that the labor market isn’t as strong as we once thought. The unemployment rate has also been creeping up. We will add, we believe this has a lot to do with the restrictive immigration policy under President Trump, but nonetheless the Fed has to make changes to monetary policy if other branches of government take actions that affect the economy.
- They’re trying to get ahead of the problem. The Fed doesn’t want to wait until we’re in a full-blown recession with massive layoffs. By cutting the rate now, they’re hoping to give the economy a little push and prevent the job market from deteriorating further.