According to the CME’s (Chicago Mercantile Exchange) FedWatch tool ( https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html ), there’s a 74% chance that the US central bank (Federal Reserve, or the Fed) will lower its benchmark interest rate by -0.25% on September 18 and it’s 26% likely that it’ll drop by -0.50%. We can quibble about what’s going to happen in a few weeks, but there’s a 100% probability that rates will begin to fall in less than a month.
The key Fed Funds rate has been in a 5.25%-5.50% range since August 2023. From April 2020 to February 2022, the rate was essentially nil. We call this monetary (policy) “easing.” The Fed took this drastic step to jump start an economy stalled out -- our GDP (gross domestic product) still collapsed by about one-third at the beginning of the pandemic before quickly rebounding -- by COVID. The last time the Fed had created “free money” with a zero rate had been to help pull us out of the Financial Crisis death spiral in 2008.
In this case, what goes down must come back up. Monetary easing helped us recover from these two crises, but rates sooner or later must be normalized. Delaying re-“tightening” monetary policy can be inflationary. This time it really was. During each of the Trump and Biden administrations, there was also $7 billion in fiscal (think taxes and spending proposed by presidents but enacted by Congress) stimuli. Since the US economy will “only” measure $27 trillion this year, that’s relatively a lot of money sloshing around. As measured by the Consumer Price Index (CPI), inflation peaked at 9.1% year-to-year in June 2022. It has since fallen to 2.9% (July 2024) as the Fed has lifted rates to help squash inflation as the threat of a weak economy, which could lead to substantial big job losses, has given way to a greater concern over rising prices.
We’ve come full circle on rates this summer. Now a recession is threatening, and inflation has significantly declined, so the Fed’s next move will be to decrease rates starting next month. I think that the Fed Funds benchmark rate will ultimately fall to 2.5% to 3.0% before it settles in this latest monetary easing.
Forgive me for boring you with Fedspeak, but it’s important. In fact, I think that forecasting rates may be an investor’s most important job.
“Who’s going to win and how will that impact the market?” You know I’m writing about the US presidential race. I’ll make a simple point from financial markets history: It doesn’t matter, or at least it’s less consequential than you may think. The data shows that the difference in returns on stocks during Republican and Democratic presidents is insignificant. The same goes for which party controls the US House or Representatives or the US Senate; and, believe it or not, there’s even no reason to fret over if the conservatives or liberals control the US Supreme Court. However, what history does show that distinctly moves markets is when all the stars line up and the White House and the same party controls both chambers of Congress. Let’s talk if you think that’s what US politics will look like after November 5. If not, don’t sweat it.