The markets continue to pretty much ignore the Government shutdown, even as it could become the longest one ever. What the markets are actually interested in is what the Federal Reserve is doing with interest rates. They cut rates again for the second time in two meetings by a quarter point. Interestingly, their decisions are usually impacted by recent economic data, which due to the Government shutdown, hasn’t been posted for several weeks. Since this cut was widely anticipated and expectations of a quarter point cut were nearly 100%, this doesn’t really change our outlook. The big question, as always, is what they will do in the future. Chair Powell tried to temper expectations that there would definitely be another rate cut in December by stating that it is not a “foregone conclusion.” While today that statement wasn’t welcomed, it does makes sense since the data are all stale and there are still several weeks of data yet to come in before the next meeting. It would be foolish of the Fed to ignore the fact that economic conditions could change over essentially three months. Even though the markets took that somewhat negatively today, the latest projections that we do have, according to the September dot plot, are that they will likely cut rates one more time in 2025.
The Federal Reserve also made a significant policy shift as they announced that they will cease the runoff of assets on their balance sheet in December. This is a secondary tool that they use to prop up liquidity in the markets as well as to fine tune interest rates. This announcement could be likened to adding a bit more to the rate cut than the headline number showed, maybe akin to half of a rate cut. This should be good for both market liquidity and in helping consumer interest rates come down slightly.
In the near term, we hope
that these moves will help the equity markets. The December Fed meeting
will be particularly interesting as we will see if there is another rate cut in
2025 and what the updated dot plot looks like. It should show how many
more cuts they are expecting. In the meantime, If the market seems to be
trending too high, we will pull back a little, perhaps near the end of the
year. Overall though, lower rates should be good for both the economy and
the market and we remain optimistic in the near term.