9/22/24

Last Weeks Markets

The long-awaited rate cuts finally took place last week. On Wednesday, the Federal Reserve announced they would be cutting the Federal Funds rate by 0.50% (50 basis points). So, what does this mean for the financial markets? The first thing to understand is which interest rates will be affected by this cut. There is a common misconception that if the Fed cuts interest rates, all interest rates will decrease across the board. However, that is not the case.  For example, mortgages are more influenced by the level of long-term interest rates, which can be affected by the Fed’s policies, but the Fed does not directly set these rates. Long-term rates have already been trending downward since the end of last year. One area that will be directly affected by the Fed’s cut is the yield investors receive on short-term deposits (such as money market funds, high-yield savings accounts, and short-term bonds).

As a result, investors who have been earning 5% on their cash for the past year will start seeing lower yields. Although no one knows exactly how low the Federal Funds rate will go, the consensus is that rates will settle around 3% over the next few years. However, this is not guaranteed—any change in economic data could shift these expectations. For example, if the economy slows significantly, rates could potentially go even lower.

Chart of the Week

Since we are in an election season, I thought a chart related to politics would be timely. This chart serves as a warning against allowing one's political views to influence their investment decisions. As you can see from the chart, Democrats currently have a much more positive view of the economy than Republicans do. The opposite was true when Trump was in office, yet both Democrats and Republicans are living in the same economy.  Whether you like who is in office or not, it's important to look at economic and market data objectively.

Written by

Ben Rones, CFA

Senior Analyst at R&R Financial

Chart Source: Pew Research Center, J.P. Morgan Asset Management. The survey was lastconducted in May 2024, “Public’s Positive Economic Ratings Slip; Inflation Still Widely Viewed as Major Problem.” Pew Research Center asks the question:“Thinking about the nation’s economy, How would you rate economic conditions in this country today… as excellent, good, only fair, or poor?”. S&P 500returns are average annualized total returns between presidential inaugurationdates and are updated monthly. Real GDP growth are average annualized GDPgrowth rates.

Guide to the Markets – U.S. Data are as of September 19, 2024.