Stocks are lower this week thanks in large part to a little surprise from the Fed. As expected, the Fed announced a 0.25% rate cut on Wednesday. But the surprise was not what they did, but what they said. Prior to this week’s meeting, the Fed and the markets were anticipating 4 rate cuts in 2025, ultimately lowering the Fed rate to 3.5% at year-end. However, the Fed is now forecasting just 2 rate cuts next year, leaving the Fed rate at 4.0% next year-end. This would mean less stimulus for the economy next year as borrowing costs would be higher and the markets are quickly making their adjustments. The Dow is now down almost 6% from it’s all-time high reached on December 4th, just a couple of weeks ago.
But the question we’ve been asking this year is, does the economy really need stimulus? According to the Atlanta Fed, we’re on track for 3.2% GDP growth this quarter, hardly a weak number. The Fed had previously mentioned that all those rate cuts were meant to protect the labor market and keep unemployment from rising. But with unemployment at a very low level of 4.2%, does this really make sense?
I believe the 4 rate cuts next year were also about the cost of refinancing the federal government’s debt. Of the approximately $7 trillion of spending in the US federal budget, $1 trillion is now going to interest payments alone. And as interest rates stay higher, that cost increases more quickly, digging us into an even deeper hole of debt.
Previously, the Fed was comfortable that inflation was heading in the right direction and could handle the stimulative effects of all those rate cuts next year. However, the election of Donald Trump has caused the Fed to consider the potential impacts of many of his professed policies on inflation. While the market has applauded his pro-growth policies, the Fed realizes many of his policies could result in potentially higher inflation. As such, they’ve decided a more cautious plan of 2 rate cuts next year is warranted until they can see what the next Trump administration will bring.
Have a great weekend.
Jack C. Harmon II, CFP®, CIMA
Principal, Harmon Financial Advisors
Registered Principal, Raymond James Financial Services
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