The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
We got what we wanted
The Fed cut rates 25 bips, as expected. The market zigged and zagged a bit upon the release of the decision. Changes to the statement were pretty unremarkable but the notable change was this “…and judges that downside risks to employment have risen.” The S&P 500 dipped to -50 points at some point during the conference before coming back towards the end. The index finished the day without much of a change. It was a wild-lite ride that allowed everyone to breathe a little bit easier by the time we approached the close. Yields climbed a bit across the curve today and Fed Funds futures expect two more 25 bip cuts over the rest of the year. Capital flow was high at 124%, confirming that investors got active as a result of the Fed decision.
The Summary of Economic Projections (SEP) provided some information to the markets that was interesting. It looks like the median Fed Funds rate for the end of 2025 is about 50 bips lower than now, that confirms market speculations. The projections for rates in 2026 and further out are also lower, to varying degrees. This also confirms market speculations but also shows that the members of the Committee are thinking that a true easing cycle lies ahead. This should be a very bullish bit of news to stocks. Surprisingly, stocks didn’t embrace the SEP.
Some other interesting tidbits from the SEP:
US real GDP was bumped *up*
US unemployment rates bumped *up*
Inflation bumped *up*
Let’s not debate these expectations. Let’s just analyze them.
The Fed thinks GDP will be better. That’s bullish for stocks.
The Fed thinks inflation will be hotter. That’s OK for stocks but really good if the Fed eases along the way, which it expects to do.
The Fed thinks unemployment will be higher. This is *why* they are willing to ease rates.
So we see the Fed telling us that they are willing to lower rates to help the labor market and are less concerned about higher inflation.
As long as inflation stays contained, that should be very good for risk assets for a long time. The risk, as I see it, is a spike in inflation that forces the Fed to return its policy attention to lowering inflation.
As of today, the Fed just told us that helping the labor market by lowering rates is more important than small tick-ups in inflation.
It’s an easing cycle and it started today.
See you tomorrow.
-Mike
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