Tag: Interest RAtes

We Do Not Need to Be in a Hurry: Powell Reiterates Cautious Fed Rate Stance

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Federal Reserve Chair Jerome Powell emphasized that the Fed is in no rush to adjust interest rates, signaling a cautious approach to monetary policy.
– Powell pointed to a strong economy and a balanced job market, reinforcing the need for patience in lowering rates.
– Inflation has eased but remains above the Fed’s 2% target, with upcoming CPI data expected to provide further clarity.

Federal Reserve Chair Jerome Powell reaffirmed the central bank’s cautious stance on interest rate policy in his testimony before the Senate Banking Committee on Tuesday. Powell underscored that with the economy maintaining its strength and policy less restrictive than before, there is no immediate need to lower rates.

“With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance,” Powell stated in his remarks. He emphasized that the Fed remains committed to ensuring inflation moves sustainably toward its 2% target before considering rate cuts.

Powell’s testimony comes amid ongoing economic uncertainties, including the impact of new trade policies under the Trump administration. While President Trump has criticized the Fed in the past, his administration has recently expressed support for the central bank’s decision to hold rates steady. Treasury Secretary Scott Bessent affirmed that the administration is focused on lowering long-term borrowing costs rather than pressuring the Fed for immediate rate cuts.

The Fed last held rates steady in the 4.25%-4.5% range at its January 29 meeting after implementing three consecutive rate cuts at the end of 2024. Despite the easing of inflationary pressures, Powell noted that the central bank would only reduce rates if inflation showed sustainable declines or if the labor market weakened unexpectedly.

Labor market data remains a key factor in the Fed’s decision-making. The January jobs report showed strong employment figures, with the unemployment rate declining and wages growing more than expected. This resilience in the job market has led many economists to predict that the Fed will not cut rates in the near term.

A closely watched inflation report, the Consumer Price Index (CPI), is set for release on Wednesday. Analysts anticipate core CPI—excluding food and energy—will have risen 3.1% year-over-year in January, slightly lower than December’s 3.2% figure. However, monthly core price increases are expected to tick up to 0.3% from the previous 0.2%, reinforcing the need for further monitoring.

Powell reiterated that while inflation has eased substantially over the past two years, it remains elevated relative to the Fed’s long-term target. He assured lawmakers that the Fed is reviewing its monetary policy strategy but will retain the 2% inflation goal as its benchmark.

As the Fed continues to navigate a complex economic landscape, Powell’s cautious tone suggests that policymakers are willing to keep rates steady for longer to ensure economic stability. Investors and market participants will be closely watching upcoming inflation data and Fed communications for further guidance on the timing of potential rate adjustments.

Fed Holds Rates Steady, Signals Caution on Inflation and Economic Policies

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The Federal Reserve kept its benchmark interest rate unchanged at 4.25%-4.50%.
– Policymakers removed previous language suggesting inflation had “made progress” toward the 2% target.
– Uncertainty looms over the impact of President Trump’s proposed tariffs and economic policies.

The Federal Reserve opted to hold interest rates steady on Wednesday, pausing after three consecutive cuts in 2024, as officials await further data on inflation and economic trends. The unanimous decision keeps the federal funds rate within the 4.25%-4.50% range, with policymakers expressing a cautious stance on future rate moves.

Notably, the Fed adjusted its policy statement, omitting previous language that inflation had “made progress” toward its 2% target. Instead, it acknowledged that inflation remains “somewhat elevated.” This signals that officials see a higher bar for additional rate cuts, even after reducing borrowing costs by a full percentage point last year.

“Economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid,” the Federal Open Market Committee (FOMC) stated. Policymakers reiterated that future rate adjustments would be data-dependent, assessing incoming economic indicators and evolving risks.

The Fed’s cautious stance follows months of inflation readings that have hovered above its 2% target. While some indicators, such as the Consumer Price Index (CPI), have shown slight improvement, core inflation remains persistent. The next reading of the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, is due on Friday and could influence future policy decisions.

Adding complexity to the Fed’s outlook, President Donald Trump has signaled intentions to impose tariffs on key trading partners, including Mexico, Canada, and China. Some economists warn that such actions could drive inflation higher, making the Fed’s task of achieving price stability more challenging. Furthermore, Trump has openly pushed for deeper rate cuts, hinting at potential friction with Fed Chair Jerome Powell.

With today’s decision, investors will closely monitor upcoming inflation reports and any shifts in the Fed’s stance. Policymakers have indicated expectations for just two rate cuts in 2025, down from previous forecasts of four. Any sustained inflationary pressures or shifts in fiscal policy could further delay monetary easing.

Fed Chair Powell is set to hold a press conference later today, where he is expected to provide additional insights into the central bank’s outlook and response to evolving economic conditions.

Positive Market Sentiment Brings Opportunity to Small and Micro-Cap Investors

Posted on by slightbourne@noblecapitalmarkets.com

The current market environment is marked by a wave of optimism, creating a fertile ground for small and micro-cap companies to thrive. While the broader market reacts to macroeconomic developments like tariffs and international trade policies, the small and micro-cap space stands apart as a unique opportunity for investors.

Tariffs: Minimal Impact on Small-Cap Companies

One of the key drivers of recent market attention has been the announcement of new tariffs as part of former President Trump’s policies. While these tariffs primarily target international trade and large multinational corporations, their effect on small-cap companies is expected to be minimal. Most small and micro-cap businesses focus on domestic markets, which shields them from the volatility of global trade tensions. This domestic focus positions these companies as a more stable option for investors seeking growth opportunities in uncertain times.

The Benefits of Lower Interest Rates

Another factor fueling positive sentiment in the small-cap space is the current trend of lower interest rates. As borrowing costs decrease, small businesses gain easier access to capital, enabling them to expand operations, invest in new projects, and drive revenue growth. For investors, this creates a virtuous cycle: lower interest rates improve business fundamentals, which in turn boosts the appeal of small-cap stocks. Historically, small-cap companies have outperformed in low-interest-rate environments, and today’s conditions appear no different.

IPO Activity Signals Market Strength

A surge in IPO activity is another indicator of the favorable environment for small and micro-cap companies. New businesses entering the public markets not only reflect broader economic optimism but also generate increased deal flow and investment opportunities within the small-cap space. This uptick in IPOs suggests that entrepreneurs and business leaders are confident in their ability to raise capital and succeed in today’s market, which bodes well for the ecosystem as a whole.

Opportunities in the Current Market Environment

The combination of limited tariff exposure, lower interest rates, and rising IPO activity underscores the abundance of opportunities available in the small and micro-cap marketplace. Investors are increasingly recognizing the potential for strong returns in this sector, particularly as the broader market sentiment remains positive. Unlike larger companies that may struggle with global uncertainties, small-cap firms are well-positioned to capitalize on domestic growth trends.

For investors seeking alpha, this environment offers a chance to identify high-growth companies at attractive valuations. Additionally, the renewed interest in small and micro-cap stocks aligns with the broader market’s appetite for innovation and entrepreneurial ventures. As these companies grow and mature, they provide a dynamic pathway for wealth creation and portfolio diversification.

The current market sentiment is paving the way for small and micro-cap companies to shine. With limited exposure to international trade risks, the tailwind of lower interest rates, and robust IPO activity, the small-cap space is uniquely positioned to benefit from today’s economic conditions. For investors, this environment represents a compelling opportunity to participate in the growth and success of innovative, domestic-focused businesses. As the marketplace evolves, those who seize the moment stand to reap significant rewards

New Inflation Reading Likely Keeps the Fed on Pause for Now

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– December’s core Consumer Price Index (CPI) rose by 0.2% month-over-month, indicating a slight deceleration in inflation.
– Federal Reserve officials are expected to maintain the current interest rates at the January policy meeting.
– Concerns persist about achieving the Fed’s 2% inflation goal amid uncertainties in fiscal and regulatory policies.

Fresh inflation data released Wednesday is likely to keep the Federal Reserve on pause during its next policy meeting this month, even though a new reading did show some signs of easing.

On a “core” basis, which eliminates the more volatile costs of food and gas, the December Consumer Price Index (CPI) climbed 0.2% over the prior month, a deceleration from November’s 0.3% monthly gain. On an annual basis, prices rose 3.2%. It was the first drop on a core basis after three months of being stuck at 3.3%.

“This latest inflation reading confirms a Fed rate cut skip at the January FOMC meeting,” said EY chief economist Gregory Daco. The new print “won’t change expectations for a pause later this month, but it should curb some of the talk about the Fed potentially raising rates,” said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management. The Fed next meets on Jan. 28-29, and investors are nearly unanimous in their view the central bank will leave rates unchanged after reducing them by a full percentage point in late 2024.

“We are making progress on inflation, it’s just very slow,” former Federal Reserve economist Claudia Sahm told Yahoo Finance Wednesday. “Cuts are not coming later this month, but that doesn’t mean they aren’t coming later this year.”

New York Fed president John Williams said after the CPI release that “while I expect that disinflation will progress, it will take time, and the process may well be choppy.” The economic outlook, he added, “remains highly uncertain, especially around potential fiscal, trade, immigration, and regulatory policies” — a reference to possible changes that could happen as part of the incoming Trump administration. Lots of Fed officials in recent weeks have been urging caution on future rate cuts.

In fact, the Fed’s December meeting minutes showed officials believed inflation could take longer than anticipated to reach their 2% goal, citing stickier-than-expected inflation data since past fall and the risks posed by new policies of Trump 2.0. They noted “the likelihood that elevated inflation could be more persistent had increased,” according to the minutes, even though they still expected the Fed to bring inflation down to its 2% goal “over the next few years.” Several members of the Fed even said at that meeting that the disinflationary process may have stalled temporarily or noted the risk that it could.

The elevated inflation concerns help explain why Fed officials in December reduced their estimate of 2025 rate cuts to two from a previous estimate of four. U.S. Federal Reserve Chair Jerome Powell speaks during a press conference where he announced the Fed had cut interest rates by a quarter point following a two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, U.S., December 18, 2024. REUTERS/Kevin Lamarque.

Inflation could show new signs of progress in year-over-year comparisons later in 2025’s first quarter since in 2024 inflation spiked back up before declining again. Fed governor Michelle Bowman may be the most worried of the Fed officials, saying last week that she could have backed a pause in interest rates last month but supported a cut as the “last step” in the central bank’s “policy recalibration.”

Kansas City Fed president Jeff Schmid, a voting FOMC member this year, said, “I believe we are near the point where the economy needs neither restriction nor support, and that policy should be neutral.” Schmid said he is in favor of adjusting rates “gradually,” noting that the strength of the economy allows the Fed to be patient. Boston Fed president Susan Collins, another voting member this year, also called for a gradual approach.

“With policy already closer to a more neutral stance, I view the current nature of uncertainty as calling for a gradual and patient approach to policymaking,” Collins said. But DWS Group head of fixed income George Catrambone said the new numbers released Wednesday provided a “sigh of relief” for the Fed. But there is still a lot of uncertainty ahead, as new policies from the Trump administration may affect the outlook. As to when the Fed may first cut rates in 2025, “if we don’t see it by Jackson Hole, it’s not coming,” Catrambone added, referring to an annual Fed event that takes place in late August.

CPI Data Confirms Fed’s December Rate Cut Path

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Consumer Price Index (CPI) rose 2.7% year-over-year in November, meeting economist expectations.
– Core inflation remains elevated at 3.3% annually, driven by higher shelter and service costs.
– Markets now strongly anticipate a 25-basis-point Federal Reserve rate cut in December.

The Bureau of Labor Statistics released November inflation data on Wednesday, showing consumer prices increased 2.7% year-over-year. This uptick from October’s 2.6% rise aligns with economist projections and solidifies expectations for the Federal Reserve to lower interest rates at its December meeting.

On a monthly basis, the CPI increased by 0.3%, the largest gain since April. Core inflation, excluding volatile food and energy prices, also rose 0.3% month-over-month and 3.3% annually for the fourth consecutive month. Sticky inflation in core components such as shelter and services continues to challenge the Federal Reserve’s goal of achieving a 2% inflation target.

Paul Ashworth, Chief North America Economist at Capital Economics, commented on the persistence of core inflation, noting that it remains a concern but is unlikely to derail the anticipated rate cut. “We don’t expect it to persuade the Fed to skip another 25bp rate cut at next week’s FOMC meeting,” he stated.

Shelter Inflation Moderates, Food Costs Persist

Shelter inflation contributed nearly 40% of the monthly CPI increase, though the annual gain of 4.7% marked a deceleration from October’s 4.9%. Both rent and owners’ equivalent rent showed their smallest monthly increases since mid-2021, suggesting potential relief in housing costs.

Meanwhile, food prices remain a sticky category for inflation. The food index rose 0.4% month-over-month, with notable increases in categories like eggs, which surged 8.2% in November after declining in October. Energy prices also edged higher, rising 0.2% month-over-month, while apparel and personal care costs saw noticeable gains.

Market and Policy Implications

Financial markets reacted positively to the CPI report, as fears of an upside surprise were unfounded. The odds of a 25-basis-point rate cut at the Fed’s December meeting increased to 97% following the release. However, economists remain cautious about potential inflationary pressures stemming from President-elect Donald Trump’s proposed policies, including tariffs and corporate tax cuts.

Seema Shah, Chief Global Strategist at Principal Asset Management, noted the Federal Reserve’s likely shift toward a more cautious approach after December. “We expect the Fed to move off autopilot in January, adopting a more cautious tone, and slowing its pace of cuts to just every other meeting,” Shah said.

As inflation trends remain in focus, the Federal Reserve’s decisions in the coming months will be critical in shaping the economic outlook for 2025.

Fed Chair Powell: No Rush to Cut Rates Amid Strong U.S. Economy

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The Federal Reserve is in no hurry to reduce interest rates due to strong economic indicators.
– Chairman Powell emphasizes that inflation remains slightly above the 2% target.
– The Fed will approach future rate cuts cautiously, allowing flexibility based on economic signals.

Federal Reserve Chair Jerome Powell recently signaled that the central bank sees no need to accelerate interest rate cuts, pointing to the resilience of the U.S. economy. Speaking at a Dallas Fed event, Powell highlighted the strength in several key economic indicators—including sustained growth and low unemployment—while acknowledging that inflation remains slightly above the Federal Reserve’s target.

Currently, inflation sits just above the Fed’s preferred 2% target, with October’s Personal Consumption Expenditures (PCE) price index estimated at around 2.3%, while core PCE inflation, which excludes volatile food and energy prices, is anticipated to reach about 2.8%. Although inflation remains higher than the target, Powell emphasized the Fed’s confidence that the economy is on a “sustainable path to 2%” inflation, justifying a gradual, measured approach to any future rate adjustments.

Despite continued economic growth, which Powell described as “stout” at an annualized rate of 2.5%, and a stable job market with a 4.1% unemployment rate, the Fed is maintaining its flexibility. According to Powell, the ongoing strength of the economy allows the Fed to “approach our decisions carefully.” This measured stance contrasts with earlier expectations from financial markets, where investors had anticipated a series of rate cuts for the next year. Now, based on Powell’s remarks, these expectations are being recalibrated, and fewer cuts are anticipated.

The Fed’s cautious stance also reflects broader economic uncertainties as the U.S. awaits potential policy changes from President-elect Donald Trump’s incoming administration, particularly regarding tax cuts, tariffs, and immigration policy. These factors could impact inflation and growth in ways that are still unfolding. Investors are closely watching the economic outlook as they prepare for potential policy shifts that could influence both the domestic economy and inflationary pressures.

Powell’s comments come at a critical time as the Fed’s next policy meeting approaches on December 17-18, with many traders expecting a further quarter-point reduction. However, recent inflation and economic strength may lead the Fed to hold off on more aggressive cuts in the near future. Powell reiterated that the Fed is committed to reaching its inflation goals, stating, “Inflation is running much closer to our 2% longer-run goal, but it is not there yet,” underscoring the Fed’s careful monitoring of inflationary trends, including housing costs.

As markets adjust to the Fed’s deliberate approach, Powell’s emphasis on data-driven, cautious decision-making has given investors insight into the central bank’s priorities. With the economy sending no urgent signals for rate cuts, the Federal Reserve appears poised to balance economic stability with its commitment to achieving sustainable inflation, underscoring its willingness to act when necessary but not before.

Fed Expected to Cut Rates After Trump’s Election Victory as Powell Seeks Stability

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– A 25 basis point rate cut is expected post-election to maintain market stability.
– Powell may address Trump’s policies’ potential impact on inflation and Fed independence.
– Trump’s win fuels speculation on replacing Powell with loyalists like Kevin Warsh.

The Federal Reserve is poised to implement a 25-basis point interest rate cut today, aiming to maintain stability and reduce economic uncertainty following Donald Trump’s recent election victory. This anticipated decision aligns with the Fed’s objective to keep the economy on track without provoking major market shifts, especially amid evolving political dynamics.

Analysts believe that the Fed’s decision reflects a cautious approach, choosing a modest cut over larger changes to convey a sense of steady confidence in its outlook. “They’d rather just cut, keep their heads down and not say anything all that new,” notes Luke Tilley, chief economist for Wilmington Trust. The Fed aims to avoid surprising investors, especially with markets already reacting to election outcomes and uncertain economic policies.

Despite today’s expected cut, Fed policymakers face an intricate economic landscape marked by robust economic indicators, persistent inflation, and fluctuating employment figures—some of which have been affected by weather and labor strikes. While consensus points toward a rate reduction, discussions may reveal differing opinions among policymakers, with some considering a pause, and others endorsing a gradual path for additional cuts. Fed Chair Jerome Powell is anticipated to forge agreement on a conservative approach, with the modest cut following September’s 50-basis point adjustment.

The election of Trump raises pertinent questions about the future of economic policy, as his plans may influence inflation, wage growth, and ultimately, the Fed’s long-term objectives. Trump’s economic agenda, which includes potential tariffs and restrictive immigration policies, could increase costs for businesses and push up consumer prices, posing challenges for the Fed in managing inflation down to its target level of 2%.

During today’s press conference, Powell will likely face questions on Trump’s policy stance, including its potential impacts on the national deficit, inflation, and employment. The Fed Chair may deflect on direct implications, stressing that the current rate cut reflects the Fed’s commitment to supporting the economy as inflation continues to moderate. This approach would emphasize the Fed’s independence in decision-making, ensuring that economic policy remains shielded from political influence.

Trump’s return to office brings renewed speculation over Powell’s future. Although Trump initially appointed Powell, he has indicated that he may prefer a change in leadership, particularly as Powell’s term concludes in 2026. Trump’s vocal criticism of Powell during his previous term focused on the Fed’s rate hikes, often calling for lower rates to boost the economy. A second term for Trump may see continued scrutiny on Fed policy, with potential contenders for Fed Chair including former Fed governor Kevin Warsh and former Trump advisor Kevin Hassett.

The question of Fed independence is once again at the forefront, with concerns that Trump’s interest in influencing rate decisions could erode the central bank’s autonomy. During his previous term, Trump made it clear that he favored policies that aligned with his growth-focused economic goals, going as far as to suggest negative interest rates. While Trump has since downplayed the idea of directly intervening in the Fed’s leadership, he has expressed a desire for a more hands-on role in monetary policy direction.

As the Fed adjusts to a post-election environment, Powell’s efforts to navigate between economic prudence and political pressures will shape its trajectory. The Fed’s emphasis on continuity and caution with today’s rate decision reflects its broader commitment to maintaining economic stability, even as the political landscape shifts around it. Investors and policymakers alike will be closely watching the Fed’s next moves, with rate decisions likely influencing market sentiment and economic policy debates in the months ahead.

Treasury Yields Drop Ahead of Election and Fed Decision

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– U.S. Treasury yields declined as investors shifted to safer assets amid election and Fed uncertainty.
– Polls show Kamala Harris and Donald Trump in a dead heat, raising concerns about congressional control and potential policy impacts.
– A quarter-point rate cut is widely expected from the Federal Reserve this week, aimed at stimulating economic growth.

US Treasury yields fell on Monday as investors braced for a high-stakes week, with the upcoming U.S. presidential election and a key Federal Reserve rate decision poised to influence the economy and markets. The 10-year Treasury yield dropped nine basis points to 4.27%, while the 2-year yield decreased by over six basis points to 4.14%. These declines come as investors shift focus to safer assets amid election uncertainty and expected economic shifts. Yields, which move inversely to bond prices, reflected some caution as traders weigh potential election outcomes and their economic implications.

Polls indicate a tight race between Vice President Kamala Harris and former President Donald Trump, with NBC News showing the candidates locked at 49% each. Investors are particularly attentive to which party will control Congress, as this could dictate future policy moves, ranging from government spending to tax reforms. A split Congress would likely mean legislative gridlock, whereas a unified government might lead to significant policy changes. The election results could potentially impact stock markets, which experienced a volatile Monday, with the Dow Jones Industrial Average falling by 225 points or 0.5%, and both the S&P 500 and Nasdaq dipping by 0.2%.

In addition to the election, the Federal Reserve’s policy meeting on Thursday could mark another pivotal moment for markets. Analysts widely anticipate a quarter-point rate cut following the Fed’s recent 50 basis point cut in September. Traders are pricing in a 99% probability of this move, as tracked by CME Group’s FedWatch Tool. A rate cut could reduce borrowing costs and stimulate economic growth, potentially offsetting some of the anticipated volatility tied to the election.

Also weighing on markets were economic data points, with September factory orders down 0.5% in line with expectations. The Purchasing Managers Index (PMI) is due on Tuesday, and these indicators may provide additional insight into the economy’s current health as markets prepare for Fed Chair Jerome Powell’s comments on Thursday. Analysts suggest Powell’s statements could hint at the Fed’s future outlook for rates, as the central bank navigates a gradually slowing economy.

The shift towards Treasurys reflects a defensive stance by investors seeking stability amid looming uncertainties. Michael Zezas, a strategist at Morgan Stanley, suggested patience will be crucial for investors as they navigate potential market noise surrounding the election. The Treasury market’s reaction indicates some investors are bracing for turbulence in stocks if the election results lead to unexpected outcomes. The safe-haven nature of U.S. bonds offers a buffer for investors looking to mitigate risk in a potentially volatile environment.

Adding to market dynamics, Nvidia shares climbed 2% on Monday after it was announced the company would replace Intel in the Dow Jones Industrial Average, a change reflecting Nvidia’s year-to-date rise of 178% as it capitalizes on the AI sector. This development underscores a broader trend where technology and AI stocks remain central to market sentiment.

As election day approaches, financial markets are set to respond not only to the presidential outcome but also to shifts in Congress. With the Fed’s decision and further economic indicators expected this week, both equities and bond markets may experience heightened volatility, particularly if post-election policy signals lead to significant shifts in fiscal or monetary policy.

Fed’s Logan Advocates Gradual Rate Cuts Amid Continued Balance Sheet Reductions

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Fed’s Logan anticipates gradual rate cuts if the economy aligns with expectations.
– The Fed will continue shrinking its balance sheet, with no plans to halt quantitative tightening.
– Logan sees ongoing market liquidity, supporting continued balance sheet reductions.

Federal Reserve Bank of Dallas President Lorie Logan stated on Monday that gradual interest rate cuts are likely on the horizon if the economy evolves as expected. She also emphasized that the Fed can continue to reduce its balance sheet while maintaining market liquidity. Logan’s remarks were delivered at the Securities Industry and Financial Markets Association annual meeting in New York, where she discussed the central bank’s plans for monetary policy normalization.

“If the economy evolves as I currently expect, a strategy of gradually lowering the policy rate toward a more normal or neutral level can help manage the risks and achieve our goals,” said Logan. She acknowledged that the U.S. economy remains strong and stable, though uncertainties persist, especially concerning the labor market and the Fed’s inflation targets.

Market participants are currently divided over whether the Federal Reserve will follow through on its plan for half a percentage point in rate cuts before year-end, as forecasted during the September policy meeting. While inflation has shown signs of easing, recent jobs data indicates a robust labor market, which may lead the Fed to reconsider the pace and size of its rate cuts.

A significant portion of Logan’s remarks centered on the Fed’s ongoing quantitative tightening (QT) efforts, a process that began in 2022 to reduce the central bank’s holdings of mortgage-backed securities and Treasury bonds. These assets were initially purchased to stimulate the economy and stabilize markets during the early stages of the COVID-19 pandemic. The Fed has reduced its balance sheet from a peak of $9 trillion to its current level of $7.1 trillion, with plans to continue shedding assets.

Logan indicated that the Fed sees no immediate need to stop the balance sheet reductions, stating that both QT and rate cuts are essential components of the Fed’s efforts to normalize monetary policy. She emphasized that ample liquidity exists in the financial system, which supports the continuation of the balance sheet drawdown.

“At present, liquidity appears to be more than ample,” Logan noted, adding that one indicator of abundant liquidity is that money market rates continue to remain well below the Fed’s interest on reserve balances rate.

Recent fluctuations in money markets, Logan suggested, are normal and not a cause for concern. “I think it’s important to tolerate normal, modest, temporary pressures of this type so we can get to an efficient balance sheet size,” she said, reinforcing her confidence in the Fed’s current approach.

Looking ahead, Logan expects that the Fed’s reverse repo facility, which allows financial institutions to park excess cash with the central bank, will see minimal usage in the long run. She hinted that reducing the interest rate on the reverse repo facility could encourage participants to move funds back into private markets, further supporting liquidity outside of the central bank.

Logan also dismissed concerns about the Fed needing to sell mortgage-backed securities in the near term, stating that it is “not a near-term issue in my view.” She reiterated that banks should have comprehensive plans to manage liquidity shortfalls and should feel comfortable using the Fed’s Discount Window liquidity facility if needed.

Logan’s comments reflect a measured approach to managing monetary policy as the U.S. economy continues to recover and adjust to post-pandemic conditions. While inflation is cooling, the Fed remains focused on maintaining flexibility and ensuring stability in the financial system.

Fed’s Key Inflation Gauge Drops to 2.2% in August, Paving Way for Further Rate Cuts

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The PCE price index showed inflation at 2.2% in August, the lowest since early 2021.
– Core PCE, excluding food and energy, rose 2.7%, staying steady with July’s reading.
– The lower-than-expected inflation could prompt additional interest rate cuts by the Fed.

The Federal Reserve’s key inflation measure, the Personal Consumption Expenditures (PCE) price index, posted a notable drop to 2.2% in August, marking the lowest inflation rate since February 2021. This is a clear signal that inflation is continuing its downward trend, positioning the Fed for future interest rate cuts.

The PCE index, which measures the cost of goods and services in the U.S. economy, saw just a 0.1% increase in August from the previous month. Economists had expected the year-over-year inflation rate to settle at 2.3%, but the actual figure came in even lower, underscoring a continued easing of inflation pressures. This development further supports the Fed’s pivot toward focusing on labor market support, rather than aggressive inflation-fighting measures.

The core PCE index, which excludes the volatile food and energy prices, rose by 0.1% in August and maintained an annual increase of 2.7%, in line with economists’ expectations. This core measure is a preferred gauge for the Fed when assessing long-term inflation trends. The steady core inflation number is likely to reinforce the Fed’s decision-making, signaling that while inflation is cooling, there are still pressures, especially in key sectors such as housing.

The recent PCE numbers are particularly crucial as they come on the heels of the Fed’s decision to cut its benchmark interest rate by half a percentage point, lowering it to a target range of 4.75%-5%. It was the first time since March 2020 that the Fed made such a significant rate cut, deviating from its typical quarter-point moves.

With inflation easing closer to the Fed’s long-term 2% target, the latest data could pave the way for additional interest rate reductions by the end of the year. Many market participants expect the Fed to make another cut by half a percentage point before the year’s end, followed by further reductions in 2025.

Fed officials have gradually shifted their focus from solely managing inflation to also supporting the U.S. labor market. Recent data has indicated some softening in the job market, with Fed policymakers noting the need to balance between maintaining price stability and ensuring continued employment growth.

Chris Larkin, managing director of trading and investing at E-Trade from Morgan Stanley, commented on the positive inflation news, saying, “Inflation continues to keep its head down, and while economic growth may be slowing, there’s no indication it’s falling off a cliff.”

Despite the positive inflation report, personal income and spending data were weaker than expected. Personal income increased by 0.2%, while spending also rose by 0.2% in August. Both figures fell short of their respective forecasts of 0.4% and 0.3%. These softer numbers suggest that while inflation may be cooling, consumer demand remains fragile, posing potential risks to broader economic growth.

Looking ahead, investors and market watchers will be closely monitoring upcoming U.S. data, including personal consumption expenditures and jobless claims, for further clues about the Fed’s next move.

Fed’s Rate Cut Offers Limited Relief for U.S. Factories Amid China Competition

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The Federal Reserve’s recent rate cut provides only marginal benefits to U.S. manufacturers.
– Rising raw material costs and competition from Chinese imports continue to challenge the U.S. manufacturing sector.
– Energy price hikes and potential port strikes add to the pressures faced by U.S. factories.

The Federal Reserve’s recent decision to cut interest rates by half a percentage point has sparked hope among some U.S. manufacturers. However, for many factory owners, the benefits of the rate reduction are overshadowed by ongoing challenges, including competition from China, high raw material prices, and labor disruptions.

Drew Greenblatt, president of Marlin Steel, a small manufacturer of wire baskets in Baltimore, represents one such case. His business had seen a surge in demand during the COVID-19 pandemic when a major client shifted orders from China to the U.S. However, this boost was short-lived, as the customer reverted back to cheaper Chinese suppliers, leaving Greenblatt grappling with surplus capacity and excess workers.

“The rate cut is welcome, but it doesn’t solve the real issue,” Greenblatt said. “We need more aggressive trade actions to level the playing field.”

The Federal Reserve’s rate cut is the first in several years, aimed at stimulating economic growth by making borrowing more affordable for businesses. In theory, lower interest rates should spur investment and expansion, but for manufacturers like Greenblatt, the rate reduction doesn’t alleviate the more significant issues plaguing the sector.

U.S. manufacturers continue to face heightened competition from low-cost Chinese imports. Despite tariffs and trade restrictions, companies often find themselves losing business to Chinese firms that offer more affordable products. In many cases, even with lower interest rates, the cost advantage of Chinese imports is too great for U.S. factories to overcome.

“The rate cut doesn’t fix supply chain issues or lower raw material costs,” said Cliff Waldman, CEO of New World Economics. “These are the real concerns U.S. manufacturers are dealing with, and lower borrowing costs won’t solve those problems.”

While competition from overseas remains a significant concern, domestic challenges also compound the difficulties faced by U.S. manufacturers. Rising electricity costs, particularly in states like California, are taking a toll on energy-intensive industries. Kevin Kelly, CEO of Emerald Packaging, shared how his family-run business, which produces plastic bags for produce companies, saw a steep rise in electricity costs over the summer.

“We just didn’t anticipate such a sharp increase in our power bill,” Kelly said. “We’ve had to adjust our production schedule and shut down some operations during peak hours, but it’s still eating into our profitability.”

The specter of labor unrest and potential port strikes further exacerbates the challenges. With a possible strike looming at major East Coast and Gulf of Mexico ports in October, manufacturers fear disruptions in supply chains, which could cause delays and drive up costs. This would be another setback for U.S. factories that are already navigating supply chain bottlenecks and inflationary pressures on inputs.

For many manufacturers, the Fed’s interest rate cut, while beneficial, offers only limited relief. Supply chain disruptions, rising raw material and energy costs, and stiff competition from Chinese imports present much more significant hurdles.

As Greenblatt noted, “The rate cut helps, but it’s just a small piece of a much bigger puzzle. We need stronger trade policies and measures that address the root causes of our struggles.”

The U.S. manufacturing sector, once a cornerstone of economic growth, now finds itself in a precarious position. While the rate cuts may provide a short-term boost, longer-term solutions are required to address the structural challenges the industry faces. Without significant reforms in trade policies and support for domestic production, manufacturers will continue to struggle despite favorable interest rates.

Fed Lowers Interest Rates by Half Point in First Cut Since 2020

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The Federal Reserve cuts interest rates by 50 basis points to a range of 4.75%-5.0%.
– Two additional rate cuts are expected later this year, with four more in 2025.
– The decision reflects concerns about a slowing labor market and confidence in inflation returning to target levels.

The Federal Reserve cut interest rates by half a percentage point on Wednesday, marking its first rate reduction since 2020. This shift signals the conclusion of the Fed’s most aggressive inflation-fighting campaign since the 1980s. With this cut, the central bank’s benchmark interest rate now stands at a new range of 4.75%-5.0%, ending the 23-year high range it held since July 2023. The decision was part of the Federal Open Market Committee’s (FOMC) two-day policy meeting.

This rate cut comes amid mounting concerns over the slowing U.S. labor market and the Fed’s renewed confidence in inflation trending downward. Employment data for the summer reflected weaker job growth, with only 118,000 jobs created in June, followed by 89,000 in July and 142,000 in August—well below the monthly average from the previous year. Fed Chair Jerome Powell emphasized the need to support a strong labor market while continuing to work toward stable prices.

Fed officials are now projecting two more 25-basis point cuts before the end of the year, followed by four more cuts in 2025, creating a path for a total of six additional cuts in the coming years. While the decision was not unanimous, with Fed Governor Michelle Bowman preferring a smaller 25-basis point cut, the majority consensus agreed on a more aggressive approach.

Inflation, which had surged following the pandemic, has shown signs of cooling in recent months. The Consumer Price Index (CPI) has consistently reported progress, with inflation now nearing the Fed’s long-term target of 2%. This, combined with the weaker labor market, has given the Fed confidence to make this significant cut.

Jerome Powell’s comments at Jackson Hole in August hinted at the possibility of such a move. He stressed that the Fed would do everything possible to support a strong labor market and indicated that the central bank had the flexibility to lower rates further if needed. Wednesday’s decision reflects the Fed’s focus on both inflation and employment as key factors influencing future monetary policy.

Despite the easing of inflation, the Fed has remained cautious, signaling that while they expect inflation to continue its downward trend, they are still closely monitoring economic data. Officials also updated projections, predicting an uptick in the unemployment rate to 4.4% and stable economic growth of 2% for the next two years.

As investors and businesses adjust to the new monetary landscape, the Fed’s rate cut is expected to influence borrowing costs, stock market activity, and broader economic behavior. The next steps, as outlined by the central bank, will depend heavily on incoming data related to inflation and employment.

Fed Poised for First Rate Cut in Four Years as Market Speculates on Scale

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Investors expect the Fed to cut rates for the first time in four years.
– A 50 basis point cut is increasingly seen as possible, but a 25 basis point cut is more likely.
– The Fed will also provide guidance on future rate cuts and the economic outlook.

The Federal Reserve is set to cut interest rates for the first time in four years, marking a pivotal moment in its monetary policy approach. Investors and market analysts are divided on the expected size of the cut. Recent market moves suggest a growing possibility of a 50 basis point reduction, though a more conservative 25 basis point cut seems more likely, according to comments from several Federal Reserve officials.

The cut, which will bring the Federal Funds rate down to a range of 5.0% to 5.25%, represents a shift from the Fed’s aggressive inflation-fighting stance. The central bank has been steadily raising rates since 2022 to combat rising prices, but as inflation has started to slow, the Fed has turned its attention toward stabilizing the labor market and supporting economic growth.

According to Wilmington Trust bond trader Wilmer Stith, a 50 basis point cut, while a possibility, is still uncertain. He noted that a more moderate 25 basis point reduction might be the more palatable option for the Fed’s policy committee.

Recent economic data, including cooling inflation numbers, have spurred calls for a larger cut. However, the Fed remains cautious, emphasizing that it will continue to monitor the labor market and broader economic trends to determine the best course of action for future cuts.

Chief economist Michael Feroli from JPMorgan has called for a more aggressive 50 basis point cut, arguing that the shift in risks justifies a bolder move. He believes that the central bank needs to recalibrate its policy to maintain economic stability. Conversely, former Kansas City Fed president Esther George expects a more modest quarter-point cut, noting that the Fed might use this opportunity to signal the potential for deeper cuts later in the year.

Fed Chair Jerome Powell has emphasized the importance of sustaining a strong labor market, pledging to do everything possible to avoid further deterioration. He has expressed concern over economic weakening and stressed that the Fed has sufficient room to cut rates if needed to support the economy. However, Powell also acknowledged that inflationary pressures have started to ease, and that gives the central bank flexibility.

The Federal Open Market Committee (FOMC) will also release updated projections for unemployment, inflation, and economic growth alongside the rate decision. These forecasts, particularly the “dot plot” outlining future rate expectations, will provide important guidance on the central bank’s approach to monetary policy through the end of the year and into 2025.

Investors will be watching closely, with the potential for deeper cuts likely to influence market sentiment. Powell’s press conference following the rate decision is expected to shed light on the Fed’s next moves, offering insights into how aggressively the central bank will act to safeguard the economy from potential recession risks.