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Well, that’s a Wrap!

Federal Reserve Chairman Jerome Powell announced this morning that it is time to begin reducing the Federal Funds rate. Powell has indicated we are well on our way to seeing inflation come back into the Fed’s desired level and as a result, it is time to start the cutting cycle. He also indicated in his comments that he no longer sees the employment market as contributing to inflation. Now the pundits will be out in full force to try and decide how large the first reduction will be and how many cuts are expected in 2024.

Within his talk, Powell indicated that the Fed would continue to watch inflation and focus on data releases over the next several months to drive policy. At the same time, this change in rate policy provides the Fed the ability to focus on the other half of the Fed’s dual mandate to help support the employment market. Powell did state that he did not want to see the employment market damaged due to a stubbornly high level of interest rates.

The Fed will meet on September 17th and 18th and there are strong expectations that the first cut will be 25 basis points. We at KoCAA are in the camp that the first cut will be announced in September, and it will be 25 basis points. There is a small number of people who are calling for a 50-basis point cut, but we think this is far too aggressive and would be incredibly out of step for this data-driven Fed to take as their first act of rate reduction.

New Home Sales were up 10% last month and this release is providing another point of optimism[1]. I have been thinking that if the Fed is too aggressive in cutting rates this could support another bout of inflation. They need to be vigilant in an effort to find a neutral Federal Funds rate without overshooting to the low side and providing the tinder to reignite an inflation fire. Mortgage rates have declined given the move from 4.5% on 10-year Treasuries to 3.80% as of 11:30 AMon August 23rd[1]. This downward move in interest rates contributed to the increase in home sales and there is still more demand than supply.

What are people to do in this environment? The equity markets are loving the potential for a rate cut and can become more extended. We are not advocating any major asset allocation shifts. However, we do think that investors should keep an eye on their equity allocation and be sure to maintain portfolio balance. Also, this rate environment will be favorable for fixed income as a decline in interest rates will add to the total return of bond investments.

Ultimately, we think the Fed will continue to be on their data-dependent path and will look to economic releases to guide the pace and magnitude of interest rate cuts as we move ahead. We will be keeping a close eye on this and stay tuned for more to come

[1] Source: Bloomberg

This commentary has been prepared by Knights of Columbus Asset Advisors (“KoCAA”) for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions and information expressed herein reflect our judgment and are subject to change without notice. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations, and (6) changes in the policies of governments and/or regulatory authorities.

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