Market Commentary: 2024 Q4

The Fed provides interest rate relief

The U.S. economy is currently showing signs of resilience and stability. Inflation has moderated, approaching the Federal Reserve’s 2% target, indicating that their recent monetary policy measures have been effective. Steady economic growth continues, with a balanced expansion across sectors. This combination of controlled inflation and sustained growth creates a favorable environment for both businesses and consumers, potentially leading to increased investment, consumer spending, and overall economic confidence.

The Fed’s decision to cut interest rates by 50 basis points after a year of steady rates has significant implications for financial markets. Rate cuts typically lead to lower borrowing costs for businesses and consumers, which can stimulate economic activity. In the stock market, this often translates to higher valuations as investors anticipate improved corporate earnings. Bond markets also react, with yields generally falling and prices rising, particularly for longer-dated securities. Additionally, rate cuts can weaken the domestic currency, potentially benefiting export-oriented companies but impacting import costs.

This move should be taken with caution. Rate-cutting cycles often signal economic deterioration, and it coincides with an uptick in unemployment and concerns in the commercial real estate sector. Afterall, why would the Fed take any action if everything is fine? However, a ‘soft landing’ scenario remains possible. This situation echoes the 1990s, where a shallow cutting cycle preceded a return to rising rates without triggering a recession. The Fed’s proactive approach in implementing cuts while the economy still shows strength could be a strategic move to extend the expansion. The coming months will be critical to determine whether we’re heading towards a more significant downturn or successfully navigating a soft landing