'When will the Fed cut rates?' is not the right question for investors right now ✂️
During normal periods, monetary policy tweaks take a back seat to earnings 🤔
During times of elevated financial market stress, the Federal Reserve’s monetary policy actions can have significant implications for markets and the economy.
In the throes of the global financial crisis, the early months of the COVID-19 pandemic, and the height of the recent inflation crisis, every move by the Fed and every statement from a Fed official mattered big time.
But when markets are relatively calm, and the economy is growing, like they are now, I’d argue the Fed — while still very important — doesn’t matter quite as much.
Sure, an interest rate cut here might nudge unemployment lower, and a rate hike there could cool inflation. But any action right now would be more about getting ahead of a potential problem than stemming a crisis.
As such, the Fed isn’t really moving the economy much right now. On the contrary, economic developments are shifting expectations for what the Fed will do next.
Expectations for rate cuts fall, and yet the stock market continues to rally? 🤨
Just last Friday, we got a jobs report that confirmed the labor market was surprisingly healthy, with payrolls growing and unemployment remaining low. In reaction to the strong report, economists at Goldman Sachs and BofA pushed back their forecasts for the Fed’s next rate cut.
But wait a second? Rate cuts are generally considered stimulative and therefore favorable for markets. Wouldn’t that mean delaying rate cuts is bad for markets?
Not necessarily!
