The U.S. economy is finally starting to show evidence of a slowdown, and that may not be a bad thing. As we all know, the Federal Reserve has been trying to stem inflation for the last 2 years. The institution has used its primary weapon in that fight by raising their base interest rate from 0% to over 5%.
What does that do? It makes the cost of borrowing money more expensive. How does that help inflation? Inflation is, at its core, a supply-demand issue. Raising interest rates is supposed to curb demand, which puts the balance of supply back in some order.
In effect, the Federal Reserve has been TRYING to slow down the economy for quite a while, and that effort seems to be working. The average full-time salary offer for open jobs was $68,900 for the last 4 months (Source: New York Federal Reserve Bank). That’s a $10,000 decrease from November of 2023. Job growth from April 2023 to March 2024 was revised lower from 2.9 million to 2.1 million (Source: Bureau of Labor Statistics). Bankrate even published that back-to-school spending dropped, and 31% of consumers indicated they would have to take on debt to pay those expenses.
Chairman Jerome Powell has indicated that the Fed feels ready to begin easing interest rates. They meet in September to discuss rate policy for the next 6 weeks. Most investors anticipate a rate cut of .25%. While that won’t do much on its own, it’s a signal that we may be in a period that leads to more rate cuts in the future.
How should investors feel about it? As I’ve mentioned in previous articles, we have been in a historically wonderful place for retired folks and those about to retire. The S&P 500 has been at or near record highs and fixed interest vehicles have yielded more than we’ve seen in 20 years.
That environment will change if the Fed gets serious about lowering their benchmark interest rate. While the equities markets may or may not continue to climb, the opportunities for high yields in fixed interest could start to dwindle. Money market rates could fall along with the Fed’s rate. Short-term rates in general would follow the Fed’s rate downward.
For the equities markets, the picture is a lot more complicated. Lowering rates can provide a boost to stocks, but a slowing economy is generally not great news for companies trying to sell goods and services to consumers.
Achieving that balance of growth without the damage of rampant inflation isn’t an easy task. Inflation is coming down, but at what cost?
As always, you can find this and many other articles about basic financial planning on our website, www.paducahfinancialconsultants.com. Just click on the “blog” section and the entire library is at your fingertips.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.