Fed chair Jay Powell has just announced a 50-basis point (1/2 percent) cut in the federal funds rate. What should we expect going forward? As I listen to the post-announcement press conference, there are a few things that come to mind.
Although some analysts were surprised by the larger size cut than was expected as recently as a couple of weeks ago, it makes sense in terms of working toward normalizing rates and, as Powell mentioned in his remarks, the fed doesn’t want to get behind the curve again like it did when it finally started hiking rates three years ago.
The next meeting will be in November and the expectation is that inflation will continue to come down, but the recent weakness in the job market is what the FOMC is putting more emphasis on at this point and is the reason behind the half a percentage point cut now.
The two major things we will be watching is the reaction of the housing market and the strength of the dollar.
The US Mortgage Banker’s Association reported stronger than expected numbers for August with both mortgage applications and refinancing turned negative trends to positive in the latest reports. Also, housing starts increased more than expected. This is likely due to the lowest 30-year mortgage rate since September of 2022, which is now 6.15%. With more cuts to the fed funds rate, the rate might even go below 6%.
Since the DXY, the dollar strength index relative to a basket of major currencies, most recently peaked in June at 106, it has dropped now to 100 and if further rate cuts are in store, it will continue to weaken. This is not good for US travelers but it is a big boost for businesses that export goods and services. It also is a tailwind for international investments and investments in small and medium companies that do not rely as much on overseas revenue.
The fed has started a new cycle. We’ll be watching to see if it continues on and what the effects will be. Don’t hesitate to reach out if you have questions about your portfolio.
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