Our Take On Rates

Our Take On Rates

April 01, 2024

During the Fed's most recent FOMC meeting, Federal Reserve Chairman Powell hinted that fiscal policy may began to shift to a more accommodative stance later in the year. Popular consensus is that we could see up to 3 rate cuts before year end. We at BCD Wealth believe that many are overestimating this likelihood.

One reason that we believe this to be true, is that it fails to consider the fact that the Federal Reserve aspires to be politically independent. Lowering rates to boost the economy as we head into what is expected to be a highly polarized and contentious election could look as if it is taking sides by trying to positively bias the populace on the economy. Doing so would irreparably damage the credibility of "The Fed" and would make it more difficult for the Federal Reserve to do its job effectively and with minimal interference from Congress. So the longer "The Fed" waits, and the further we get into the year, the less likely it is that they do anything as we encroach upon the November elections.

When the Federal Reserve ultimately does begin to lower rates, many may be disappointed by the amount that rates actually drop by. Federal funds rate movement (either up or down) have historically come in multiples of 25 bps (one basis point equals one hundredth of 1%) if we look at the data. If we consider the fact that the current effective federal funds rate is 5.33%, and that over the past 70 years the average federal funds rate is 4.61%, any more than 2 rate cuts may be a stretch if history is going to serve as a guide.

Finally rate cuts at their fundamental level are indications of a lack of confidence in the health of the economy. With unemployment rates at 3.9%, wages growing faster than core inflation, and a stock market that appears to be healthy with robust corporate earnings, many of the metrics that the Federal Reserve members reference, in their own decision making process, make the case that the economy does not need any near term support. If we decide to take a more forward looking, long term view point, once could make the case that interest rates may have to be higher for longer as investors demand an increasing rate of return on their capital for the higher perceived risk of lending to the U.S. Government. As U.S. deficits continue to balloon and as demand for U.S. debt continues to decline globally, we believe that rates will remain elevated and bond markets will counteract many of the Fed's monetary policies if they decide to lower rates without an accompanying reduction in fiscal spending or increase in tax rates from Congress. This could be the beginning of this trend.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.