Last week we pointed out that markets were down as robust economic numbers, specifically the December jobs report, were raising concerns that the economy was potentially too strong and inflation could possibly reaccelerate.  However, this week we received the December inflation numbers and they were a bit better than expected so stocks have rallied this week.  Wall Street hopes these good inflation numbers will make the Fed comfortable cutting interest rates 3 – 4 times this year without risking a resurgence of inflation.

Although the economy may not NEED lower interest rates, there are a couple of reasons the Fed would consider rate cuts anyway.  First, the stock market has become a huge part of the US economy and it affects a lot of households.

Surprises by the Fed could cause significant shocks to the stock market and negatively affect the economy.  Right now, the market wants lower interest rates and if the Fed feels they can cut rates without risking higher inflation they probably will.

Additionally, lower interest rates ease the burden of borrowers and there is no greater borrower than the US government.  By lowering short-term interest rates, the Fed can help the US government borrow at lower costs.

 

Have a great weekend.

 

Jack C. Harmon II, CFP^®, CIMA

Principal, Harmon Financial Advisors

Registered Principal, Raymond James Financial Services

 

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