A weak August jobs report showing a significant drop in job growth and a rising unemployment rate, strengthens the case for a rate cut at the September 16-17 meeting. Financial markets anticipate this move to provide an economic boost, though some officials and economists remain cautious, wary of reigniting inflation.
The Fed has a dual mandate to keep inflation in check with a target of 2% annually while maintaining full employment in the labor market. It is quite the juggling act. The most recent CPI (consumer price index) readings for July, indicated the year over year (all items) CPI increase 2.7%. This is very close to the Fed's target. There is some speculation that the recent tariffs could have a one-time bump to the index, but up to this point, we are not really seeing a significant increase. It appears that the Fed may begin lowering interest rates in mid-September, which may mark the beginning of a series of rate cuts. While the exact size is debated, a .25% rate cut is expected. I'm sure the Fed will continue to remain cautious about cutting too much, too fast to avoid sparking up inflation, which has been stubborn up to this point.
So, what does that mean to you? Well, if you're a "safe" saver we will see yields on CD's, bonds and other fixed investments begin to drop. I didn't think fixed rates at these levels would last forever. If, on the other hand, you are a little more risk tolerant, investing in stock, the cost of borrowing will become cheaper for companies, helping to boost corporate profits. Companies most affected by lower interest rates are those that carry debt. Small cap stocks tend to have more debt than their large cap counterparts. Also, REITS (Real Estate Investment Trusts) many times have debt to finance apartment buildings, offices, shopping malls, etc. Just like an individual with a high interest mortgage, may be able to refinance and free up cash, companies are affected much the same way as rates fall.
Though it's important not to time the markets, having a well-diversified mix of investments will help to weather whatever storm may come. If you would like to take a look at your current asset allocation, give us a call to review.