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When Will The Fed Lower Rates? Episode 471
Unlock the mystery of the Federal Reserve's unyielding stance on interest rates with us, as we tackle the complexities of an economy where high-flying GDP numbers don't necessarily mean more money in your pocket. In a whirlwind tour through the latest economic developments, we dissect the Fed's rationale for maintaining higher rates post-July 2023, in the face of cooling inflation and a robust economy. It's not just a game of numbers; it's about grasping the nuanced impact on your wallet, as a strong GDP fails to echo the realities of diminishing real income for many.
Venture further with us into the financial fray where we juxtapose cheering GDP reports against the sobering swell of the federal deficit. As Wall Street navigates through the treacherous waters of earnings seasons and corporate forecasts, we analyze the dance of the stock market, swayed by the rhythm of interest rates and the looming anticipation of political shifts. No stone is left unturned, as we piece together the macroeconomic puzzle with the microeconomic intricacies to arm you, the investor, with a well-rounded strategy suited for the unpredictable economic waves ahead.
Welcome back to the podcast. This is episode number 471. I am Tom Malouli Question that we're getting the most this week. We're recording this in February of 2024. Why hasn't the Federal Reserve cut interest rates yet? I think there's a good reason for it. Let's talk about this, but first we have to back up and just walk down memory lane about a few things that happened Over the last few years.
Speaker 1:In a 14 month period, from March of 2022 through July of 2023, the Federal Reserve raised interest rates massively. When the Fed talks about setting a policy rate for short-term interest rates, for what they call Fed funds, they give it a range. They never say the rate is going to be exactly this. They give you a range and so when they were starting to raise rates, the Federal funds rate at the time March of 2022, not that long ago the Federal funds rate range was from 0% to a quarter 25 basis points by July of 2023, july 2023, the Federal funds rate and still the same. Today. The Federal funds rate is now 5.25, the range 5.25 to 5.5%. I just want to remind our listeners that the Federal funds rate was raised last in July of 2023. As of the recording that we're making today, in February of 2024, that was seven months ago. It normally takes six months to as long as 18 months to see interest rate changes flow through to the economy, and so for folks to ask the Fed to be lowering rates now doesn't really seem to make a lot of sense. They just finished raising rates. Why are they going to be in such a hurry to lower rates? And let's talk about lowering rates. We're not going to see the Federal funds rate back at 0 or 25 basis points anytime soon, and I don't know if we will ever see interest rates at those kind of levels again. What I think folks need to adjust to is the idea that interest rate policy from 2008 through 2022, when interest rates for most of that time were down around zero, between zero and 1% interest rate policy like that is an exception, not the rule, and so what we saw in the previous 15 years was a fluke, was a real exception, and we need to get used to or readjust to the idea that we're going to be seeing interest rates that are not zero anymore.
Speaker 1:Listeners to your previous episodes know, because I've said it many times, that many economists, and maybe all economists and a lot of market strategists have said for years that if the Federal Reserve ever raised rates that quickly in a 14 month period we went from essentially zero to almost five and a half percent. If the Fed ever raised rates that fast, it's for two reasons. The first reason is it's because they have some catching up to do and it's true they did have a lot of catching up to do because inflation was out of control. The second reason, or the second point behind that, is if the Fed ever raised rates that quickly, that aggressively, the economy would collapse. The economy would crash. We'd see a lot of problems. That did not happen.
Speaker 1:But understand that the Fed is not in a hurry to lower rates. Really they're in the driver's seat. Right now we're getting report after report that shows inflation is cooling and GDP, which shows the gross domestic product, that's our productivity, that's our output, is growing. When the Fed is lowering rates whatever they lower rates, they're trying to stimulate the economy. There is no need to stimulate an economy that's already growing.
Speaker 1:The fear now that the Federal Reserve has is they're worried that if they say, okay, we won the game, inflation seems to be cooling off and we don't have to worry about it anymore. What's happened in decades past is when they take their foot off the gas when it comes to interest rates. Inflation tends to reaccelerate and come back. If the Fed were to start cutting rates immediately, we'd see additional growth stimulation in the economy. It's very, very likely that we would see inflation tick higher and then we've got another problem. Now the Fed is going to have to reverse course and start raising rates again. With short-term rates for the Federal Reserve, for federal funds rate now at over 5%, the Fed has plenty of room to maneuver. I don't see them drastically lowering rates unless we kind of see some kind of calamity, some crisis. A lot of people like to overuse the term crisis. We're talking about a real emergency and certainly at least we've seen in years past the Fed will try to stay out of the picture when it comes to election year cycles, and we're in one right now.
Speaker 1:I want to shift gears for a moment to talk about GDP and the gross domestic product, because a lot of people there are plenty of folks in our industry who equate GDP as the growth in the economy. It's not exactly growth in the economy. Let's talk about this. You'll see, report after report, that the economy is in great shape, but yet when you talk to the man on the street, they have a different story to tell. It's a little chilling to see that real income is down. Most people feel like they've downgraded their living standards over the last few years, but Still there hasn't been a declaration that there's been some kind of recession.
Speaker 1:We know that the unemployment reports that come out on a monthly basis Are somewhat flawed in the sense that they don't account for people who drop out of the labor force or they also don't account for people who hold multiple jobs, multiple part time jobs. There was a joke Twenty years ago. The people said oh, you know, george Bush created two million jobs this year and I have three of them. Technically, unemployment Remains low where under 4%. Historically, those are. That's a great number, but has it really changed your situation? I don't know.
Speaker 1:When you look at indicators like gross domestic product GDP, it's not necessarily a measure of your standard of living or really even economic growth. Gross domestic product measures output Stuff that goes on in dollar terms, whether you know it's really efficient or not. So we had some GDP numbers that came in for the fourth quarter of 2023 recently and the numbers were good. They were way better than what the street was expected. The problem is that what most people don't associate with the GDP, output numbers, productivity, but a lot of people don't equate is that in the past 12 months the federal deficit, the federal deficit, increased by 1.3 trillion dollars. Yet our GDP, our gross domestic product, increased by about half of that, 600 billion dollars. So we are creating a lot more debt and we're not seeing that flow through in the economy into real numbers. Put it another way Fourth quarter gross domestic product grew by over 300 billion dollars. Gdp for the United States of America is now approaching 28 trillion dollars. The problem is that our budget deficit rose by a substantial amount. We now have a budget deficit of over 500 billion dollars. Put it another way For every dollar in growth, it cost us about a buck 50 in new debt. It's not that great. We're getting a different kind of growth and I think people are used to this labor force participation rate, which is now 62. 62.5% that means a little more than 62% of people who could work are working and they show the employment population ratio at 60.2% were also little changed. So what we're seeing now is that we're getting a lot of growth in GDP. Most of it is being fueled by debt, not necessarily by output.
Speaker 1:What does this mean for the stock market and Wall Street and your investments? Well, right now, most companies that are reporting earnings at this time of the year are reporting good earnings. We still get the occasional surprise, the negative surprise in earnings. They always seem to be the exception. Usually, companies we usually see a number somewhere in the vicinity of 70 plus percent companies reporting higher earnings than expected. So most companies are reporting good earnings and, even better, most companies are forecasting continued good earnings growth. Going forward Markets, I think a lot of people tend to look in the rear view mirror and say well, their earnings were good, so the stock should go up. Sometimes stocks go down, even on good earnings, because they weren't as good as expected or the forecast for the next quarter or the next year was not so bright.
Speaker 1:Understand that markets move today. Doesn't matter what day of the week you're listening to this, but markets move today based on the direction and the perception of two things. Number one what are the earnings trends? Yes, you can have a good quarter that basically tells your investors what happened over the last 90 days, but if you're giving a forecast of lackluster earnings or low earnings growth or negative earnings growth. That's not a good sign. So markets move today based on two things the perception that tomorrow will be better and earnings will continue to climb, and the second thing that markets move on is the trend in interest rates. It's not necessarily where interest rates are today. It's where people think interest rates are going to be tomorrow, and these two things drive markets more than anything else that's out there Right now.
Speaker 1:The Fed has telegraphed to folks that are paying attention that they feel that they're done raising interest rates. They don't wanna be in a hurry to lower interest rates. I anticipate that we may see one or two interest rate cuts this year, but the timing is always gonna be off. We've got an election in November. We've got the Fed that also has said that they wanna see continued decreases in inflation in the system, so they're running into a narrow window where they'll be able to cut rates and stay out of the election news or noise that's out there.
Speaker 1:So I don't really know what people are thinking when they forecast three, four, five interest rate cuts. I don't see it. When you have earnings that are going to be flat or down or interest rates that are going to go up in the future, you're going headfirst into the wind. When you have earnings that are trending up in the future and interest rates that are trending lower in the future, you're getting a tailwind when it comes to your investments. A lot of technical talk about different things that influence markets. It's not a day-to-day thing. You need to step back and look at the bigger picture and where things are going. That's going to wrap up episode 471 of the Malooly Asset Podcast. Thanks, as always, for tuning in.
Speaker 2:Tom Malooly is an investment advisor representative with Malooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Malooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Malooly Asset Management may maintain positions and securities discussed in this podcast. Thank you.