The Fed Holds Steady, for Now

Revised job numbers are shifting expectations for interest rate cuts this fall. Here’s our take.

Last Wednesday, the investment world had all eyes on Jerome Powell, chairman of the Federal Reserve, as he outlined the state of inflation, the workforce, and the anticipated response of the Central Bank’s monetary policy. Wall Street’s collective breath has been held for the “all-clear” signal from the Fed to resume its rate-cutting campaign, which began last September and stalled out just a few months later in December after a total of 1% in “cuts”.

In the world of investing, no institution carries as much influence as the Federal Reserve (or the Fed). Their mandate is simple and measured via two items: low unemployment and stable prices (inflation near 2%). “Data dependency” is a frequently used adjective for the Fed’s decision-making process, as it assesses droves of data trends of the labor market and inflation. From setting interest rates to adjusting monetary policy, the Fed carries a heavy stick, able to substantially alter the trajectory of our economy, from stock valuations to mortgage rates. Overly simplified, lower interest rates spur “easier” market conditions. These easy conditions preclude better economic growth and, as a result, lower unemployment, but also increase the risks of higher inflation. Between a rock and a hard place, the Fed’s dilemma is to thread the needle between stimulating economic growth without kicking up runaway inflation.

The heavy attention is for good reason, as these inflection points of change from stable rates to cuts or hikes often signal the path ahead for the direction of interest rates to come. Given the modest but stable labor market and downtrend in inflation, the team at Harvest has felt that the Fed has enough data in hand to resume rate cuts and help stimulate consumers and corporations alike, who have been swimming against the current of high financing costs.

As expected from the prior meetings, Fed Chair Powell announced that interest rates would remain unchanged at this meeting at 4.25-4.50%. The less expected outcome of the meeting was Powell’s outlook of the labor market as strong and stable, and upside risks to inflation (no need for stimulus). While not exactly what the market would have liked to hear, there was a clear response of some discontent but acceptance following Wednesday’s press conference.

On Friday morning, a set of labor market data—including nonfarm payrolls—was released. What made this regularly scheduled stat on the job market standout was not only the less-than-expected change in month-over-month employment, but a historical level of downward revision on the prior 3 months’ worth of data as the information became updated and revealed a much weaker labor market than we had been under the assumption. Now, it is worth restating that we do not allow politics to shape the way we select and manage investments, so we will table the discussion around speculating whether there is more to the story behind why the initial data was so far from the updates that we received Friday. What we do find relevant is that the market is projecting a 90% chance of a 0.25% rate cut at the September 17^th meeting, in large part due to the revisions of a weaker jobs market.

Given the culmination of last week’s events, we anticipate seeing a handful of rate cuts through the end of this year. Our eyes will be focused on the current Fed chair’s next public appearance, a keynote address at the Jackson Hole Symposium later this month, to monitor their interpretation of the revised data following his last press conference. Our anticipation is that he will make it clear and apparent that a resumption in rate cuts will begin in the September meeting, with the prospects of more to follow. We believe this should propel the market “melt-up” that we have witnessed in the past few months into fresh highs in the back half of this year.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. This material was prepared for Harvest Wealth Partners’ financial advisors’ use.