On September 18th the FED announced that it will be reducing the Fed Funds Rate by 1/2 point from the 5/25-5.50% range to 4/75-5.00% range. Monetary policy shifted from “higher for longer” to reducing interest rates during the next 18 months. The bond market is currently “pricing-in” a Fed Funds rate of 3.45% in June 2025 and 2.89% by the end of 2025.
The Fed Funds rate has a direct impact on consumer and commercial variable rate loans, specifically home-equity loans, credit cards, and various commercial loans.
30-year fixed mortgage rates, however, are based on the 10-year treasury bond yield, which has declined from 4.9% a year ago to the current 3.8%. The graph below illustrates the more than one percentage point decline of 30-year fixed mortgage loans.
With the debate now over regarding when the FED will commence reducing interest rates, how do equity markets respond? Charles Schwab & Co. Inc.” Schwab” recently completed research on this issue reviewing the 14 times the FED reduced interest rates since 1929. While 14 observations do not constitute a “statistically significant” data set, these historical events give us optimism the US stock markets may perform well during the next 12 months. The graph on the following page is extracted from the Schwab report.
2024 Outlook
Positive Tailwinds
- Inflation is heading to the FED’s 2.0% target
- The FED commenced reducing interest rates policy
- Earnings of companies in the S&P 500 Index are expected to grow 8-12% in 2024 and 2025
Negative Headwinds
- Economic growth slows more than expected, and a recession unfolds in 2025.
- Federal deficit spending continues to put upward pressure on prices by adding to “demand” in the economy.
- Inflation measures do not continue their downward trajectory.
Rich Lawrence, CFA October 2, 2024
DISCLOSURE:
Opinions about the future are not predictions, guarantees or forecasts. Investing in stock and bond markets have risks that could lead to investors losing money.