Wednesday, September 18, 2024

50 points? Well that's a nice surpise!

Well alright, alright, alright!
With both the jobs picture and inflation softening, the central bank’s Federal Open Market Committee chose to lower its key overnight borrowing rate by a half percentage point, or 50 basis points, affirming market expectations that had recently shifted from an outlook for a cut half that size.

Outside of the emergency rate reductions during Covid, the last time the FOMC cut by half a point was in 2008 during the global financial crisis….

In addition to this reduction, the committee indicated through its “dot plot” the equivalent of 50 more basis points of cuts by the end of the year, close to market pricing. The matrix of individual officials’ expectations pointed to another full percentage point in cuts by the end of 2025 and a half point in 2026. In all, the dot plot shows the benchmark rate coming down about 2 percentage points beyond Wednesday’s move.

“The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” the post-meeting statement said.

Yes, our economy is in balance, and we should care as much about job growth continuing and keeping unemployment low as we do the still-falling rate of inflation. Although I’d still argue that 2% inflation is an arbitrary number and our economy has been fine at 3-4%, let alone the 2.5% or so that we’re at today.

Two of the biggest economic headwinds right now are high debt costs and a lack of available housing inventory that is driving up home prices. Both should be less of a problem with lower Fed Funds rates. We may already be seeing hints of this, as mortgage rates had already gone down ahead of this meeting in anticipation of future Fed Funds cuts. And new home construction bounced back from a weak July and had a strong August, along with an increase in permits for August to the highest levels in 5 months.

But you can also see that the number of housing permits is still down compared to where we were a year ago, which indicates that the Fed’s high rates likely were holding people back from taking action, and limiting growth in the construction industry as a result.

More good news on the housing inventory front came with a sizable jump in the number of home completions, up 9.2% (annualized basis) from July and up more than 30% from August of 2023, with last month’s increase in completions coming from multi-unit complexes. So hopefully that allows for more supply to hit the market and help to moderate high home prices.

You’d think that Wall Street would have been overjoyed with cheaper borrowing, but after an early pop on the news of the rate cut, the stock market gave up those gains and had a rare losing day in September.

Seems odd, but apparently some of it was cashing in gains from front-running the rate cut. And it looks like some of it was because the Fed’s future guidance indicated more cuts (and questionable levels of growth?) coming.
Markets are now fully pricing in a cut of at least 25 basis points at the Fed's November meeting, with a roughly 35% chance for another 50 basis point cut.

"It’s amazing to me how even when markets get what they seemingly want, they immediately want more," said Steve Sosnick, chief market strategist at Interactive Brokers in Greenwich, Connecticut.

"It’s important to note that stocks are not rocketing ahead (at least not yet) after getting what they wanted. After 7 straight up days, a lot of good news was priced in."

Like WaPo writer Heather Long, I was pleasantly surprised that the Fed did the right thing, instead of pre-emptively caving to whatever Trump and JV Vance and the rest of the GOPs might say in the wake of a 50-point rate cut. The GOP's whole economic argument is to say that inflation is still raging and that Americans are struggling, and the Fed just nuked that theme with this rate cut today.

We sure JV Vance has "fans"? At least among people who get outside of their basements? Maybe people forced to be there by Trump/GOP....

The decision by the Fed to admit reality and catch up to their lack of action in July is the right one. It's a good day today, and should make things easier and less frustrating for Americans who have been penalized by these excessive interest rates for too long.
Posted by at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)