What has been blurry for most of the year will become clearer this fall. As it stands, the Federal Reserve is widely expected to cut rates beginning next week, and the presidential election will be decided in the coming months. Markets typically don’t react well to uncertainty, and the economic picture should become a bit clearer as we head toward the winter.
As I write today, markets are pricing in just about a coin flip on whether the September 2024 rate cut will be 25 or 50 basis points, with a little more weight on 25.[1] By the time this is released, the decision will already be made. The decision will likely impact future rate decisions as the terminal federal funds rate is path-dependent on what happens this month, alongside a broad range of economic indicators. In the past few months, there have been a few downward revisions of the jobs added, with June having a downward revision of 61,000 and July 25,000, on top of an 800,000 revision in the 12 months through March 2024.[2] This suggests a slowing economy and a need to ease monetary policy, potentially faster than was expected a few months ago.
I imagine Jerome Powell is hoping to pat himself on the back for a soft landing, and we may begin to see whether this will happen as monetary policy starts to ease this fall. So far, the economy has been relatively strong despite the sharp increases in interest rates, with the measuring stick being Real GDP growth.[3] A soft-landing scenario would see this trend continue, all while the inflation rate eases back to (or near) the 2% target, unemployment stays low, consumer spending is strong, and job numbers improving again. This is possible, but things do have to continue to go in the right direction all through the election season and the associated uncertainty.
While I am no political expert, I know that elections often spook investors due to the media rhetoric of the decision being existential or the more genuine fear of policy change that could potentially have a negative effect on markets. While there is often market volatility throughout the year, it tends to get more attention around elections. Market reactions to elections can vary widely based on candidates, platforms, and proposed policies. I would encourage you to make sure clients are focused on the plans implemented for long-term success rather than getting overly concerned about near-term volatility.
Have a great fall season!
[1] CME FedWatch – CME Group. (n.d.). https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
[2] Back, A. (2024, September 7). Jobs slowdown frustrates investors who wanted certainty … https://www.wsj.com/finance/stocks/jobs-slowdown-frustrates-investors-who-wanted-certainty-on-the-fed-2b85ac13
[3] Gross domestic product. Gross Domestic Product | U.S. Bureau of Economic Analysis (BEA). (2024, August 29). https://www.bea.gov/data/gdp/gross-domestic-product
