For investors, the most newsworthy event of the month was the Federal Reserve meeting June 11-12. The Fed decided to keep its key interest rate unchanged and signaled that only one rate cut is expected before year-end.
With market observers hoping for a signal for multiple rate cuts in the second half of the year, Federal Open Market Committee (“FOMC”) policymakers surprisingly took two rate cuts off the table from the three indicated earlier this year.
Updated “dot-plot” forecasts released after the June meeting indicated subtle optimism that inflation remains on track to reach the Fed’s 2% target, allowing for potential monetary policy loosening later this year.
According to the June Fed statement, “In recent months, there has been modest further progress toward the Committee’s 2% inflation objective.” The previous language said there had been a lack of further progress on inflation. (1)
FOMC members, through the dot-plot survey, indicated more cuts in 2025 than previously anticipated, with four 0.25% reductions, up from three.
In essence, inflation has remained sticky, unemployment low and an engaged consumer along with government spending has bolstered U.S. Gross Domestic Product. While the latter indicates a strong U.S. economy, it makes the Fed’s job in harnessing inflation more difficult. Historically, reductions in inflation have coincided with cutbacks in spending, which have been cited by economists as a cause of recessions. Threading the needle between reducing inflation through tight monetary policy while simultaneously avoiding a recession has been coined as the “soft-landing”. In other words, slowing the economy without inducing a recession.
So far the Fed has been clear and unwavering that they will do what is necessary to get inflation back to the 2% target and any Fed actions will be “data driven”.
The early June forecasts from the 19 FOMC meeting participants come as investors hope that the Fed will start easing after raising benchmark rates to their highest level in 23 years.
The Federal Funds Rate (“FFR”), which sets overnight borrowing costs for banks, is currently targeted in a range between 5.25%-5.50%. Though consumers do not participate directly in overnight bank borrowing activities, the FFR affects consumers in a variety of ways as it sets a “base rate” for many types of consumer debt including fixed and adjustable-rate mortgages, home equity loans, revolving consumer credit, auto loans, adjustable-rate private student loans and credit cards.
Investors are hoping that the Fed indeed threads the needle and cuts rates before the U.S. economy slumps into a recession. The fear is that at current interest rate levels, the high borrowing costs and overall lack of lending liquidity could force small and medium-sized companies to cut costs potentially involving widespread layoffs.
In the past, the Fed has shown up late to the party (the hot economy), and now, is on the verge of overstaying their welcome (keeping rates too high for too long).
There are 33 million small businesses in the United States. Small businesses employ 61.7 million Americans, totaling 46.4% of private sector employees. A small business has 1 to 99 paid employees; a medium-sized business has 100 to 499 paid employees; and a large business has 500 or more paid employees.
(2)
Small and medium sized businesses are critical to the U.S. economy and will be the first to struggle if interest rates stay too high for too long. The Investment Committee at WT Wealth Management are confident that the Fed is mindful and observant to this and will act prudently.
Rate cuts have traditionally been a very good catalyst for the equity and bond markets. The U.S. equity markets have had an exceptional first half of 2024 on the hopes that the Fed will cut rates, though they haven’t yet. In the meantime, Artificial Intelligence optimism has been the straw that stirs the drink.
So, what’s in store for the second half of 2024? We believe, despite potential short-term volatility related to the upcoming Presidential Election, that many of the same key ingredients that fueled the first half of the year are still in place and could lead to a strong second half.
FOOTNOTES
- Fed holds rates steady, indicates only one cut coming this year
CNBC.com
- Frequently Asked Questions About Small Business 2023
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