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A Long Expected Rate Cut

Written by Minich MacGregor Wealth Management on September 24, 2024. Posted in News, Posts.

In just about every scary movie, there’s always that one scene near the end where the hero thinks they’ve escaped, or that the monster is dead — only for there to be one more “jump scare” in store.

This is the scenario currently facing the Federal Reserve.

Over the last two years, the Fed has been trying to do the seemingly impossible: Cool down consumer prices without starting a recession. To do that, the Fed turned to the only tool available to them: Interest rate hikes. Rates began gradually rising in early 2022 and had been at about 5.33% since August of last year.¹ That was the highest they’d been in 23 years.¹

Higher interest rates serve as a kind of flame retardant on the overall economy because they make it more expensive for consumers and businesses to borrow money. This, in turn, reduces how much money people spend. Since a consumer spending is a corporation’s income, lower spending forces companies to lower their prices to attract new business. When this happens across the board, inflation will cool to a more manageable level.

This approach works, but the problem is that it’s applying a blunt instrument to a delicate situation. Since 1955, virtually every period of major rate hikes has led to a downturn.¹ If prices cool down too much, too fast, businesses stop hiring. Next, they start laying off workers to make up for the decrease in revenue. The economy contracts, and we have a recession. Some of these recessions were very short, but every downturn is painful in its own way. So, bringing down inflation without bringing down the economy? History suggests it can’t be done.

But the data we’re seeing now suggests that this time, the Fed may have just done it.

Since the rate hikes began, inflation has fallen from a high of 9.1% in 2022 to 2.5% this past August.² That’s extremely close to the Fed’s stated goal of a 2% rate of inflation. Meanwhile, the economy has so far avoided a recession. Our nation’s GDP grew by approximately 1.4% in the first quarter of this year, and 3% in the second.³

But in a scary movie, the characters who gloat or celebrate too soon…they never make it out, do they? It’s the ones who keep their heads and don’t get carried away who make it to the credits.

So, the Fed can’t celebrate yet. Just in case the monster isn’t really dead.

You see, while inflation has been going down this year, something else has been going up: Unemployment. After falling to a near-historic low of 3.4% in April 2023, the jobless rate has been slowly but consistently climbing. (The most recent jobs report, in August, showed unemployment was at 4.2%.)⁴ Now, this isn’t a large number. In historical context, it’s quite low. But what matters is the trend, and the trend has undoubtedly been going up.

Because of these twin factors – declining inflation, rising unemployment — we’ve known for a while that the Fed must begin cutting interest rates. The question was when, and by how much. Well, now we know the answer: September 18, and 0.50%.⁵ It’s the first cut in over four years, and it brings rates down to a range of 4.75-5%.

Investors have been waiting expectantly for this for pretty much the entire year. It’s one of the main reasons the S&P 500 has done so well in 2024. So, the move itself wasn’t a surprise. What was a little surprising, though, was that the Fed cut rates by 0.50%. That may not sound impressive, but it’s larger than the 0.25% cut many analysts expected. And it illustrates the new challenge our country faces: How do you cut rates in a way that prevents runaway unemployment without letting inflation climb again?

In other words, how do we ensure the monster’s truly dead? How do we avoid another jump scare?

You see, if the Fed cuts rates by too much, too fast, it could prompt a surge in borrowing and spending. That could overheat the economy and cause prices to spike again, undoing all the progress we’ve made. On the other hand, if the Fed cuts rates by too little, too slowly, it may be too little, too late for the labor market. Unemployment could turn into a runaway train, drawing the economy behind it. The war on inflation would still be won…but at what cost?

As investors, one of the issues we face is that there’s no reliable way to know exactly what will happen. Right now, the economy appears to contain more positive signs than negative, and this new rate cut is a very welcome development. However, it’s worth remembering that rises in unemployment often precede a recession. Furthermore, many past recessions began just after the Fed began cutting rates, not while they were hiking them. When the Fed announced the rate cut on September 18, they also suggested that further, smaller cuts are in store this year. While the markets have embraced the news, and may well continue to rise, we must be mentally prepared for bouts of volatility as investors parse every bit of data for signs of either rebounding inflation or runaway unemployment.

Fortunately, we are set up to respond appropriately to any signs of volatility. Moving forward, as the Fed begins cutting interest rates at last, we’ll continue to analyze how both the overall market – and the various sectors within the market – are trending. As you know, we have put in place a series of rules that determine at what point in a trend we decide to buy, and when we decide to sell. This enables us to switch between offense and defense at any time. If our technical signals indicate it’s time to play offense and seize future opportunities or play defense to protect your gains, we can do so without waiting to see what the overall markets will do.

So, as we move into October, we want you to focus on what really matters. The fall colors. Pumpkin lattes and pumpkin carving. Go watch a real scary movie if that’s your thing.

Are you doing everything you can to help your story contain the words, “Happily ever after”?

Let us help you. For our clients, we monitor the markets, track the data, and adapt as necessary so they need never worry about jump scares.

As always, please let us know if you have any questions or concerns. Have a great week!

SOURCES
¹ “Federal Funds Effective Rate,” Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/FEDFUNDS
² “The Consumer Price Index rose 2.5 percent over the past year,” U.S. Bureau of Labor Statistics, https://www.bls.gov/opub/ted/2024/the-consumer-price-index-rose-2-5-percent-over-the-past-year.htm
³ “Gross Domestic Product (Second Estimate), Second Quarter 2024,” U.S. Bureau of Economic Analysis, https://www.bea.gov/news/2024/gross-domestic-product-second-estimate-corporate-profits-preliminary-estimate-second
⁴ “The Employment Situation — August 2024,” U.S. Bureau of Labor Statistics, https://www.bls.gov/news.release/pdf/empsit.pdf
⁵ “Federal Reserve issues FOMC statement,” Federal Reserve Board of Governors, https://www.federalreserve.gov/newsevents/pressreleases/monetary20240918a.htm

Labor Day – The Eight Hour Work Day

Written by Minich MacGregor Wealth Management on September 2, 2024. Posted in Articles, News, Posts.

Happy Labor Day!

Most of us associate Labor Day with BBQs, parades, and weekend camping trips. But the more we learn about the holiday, the more we realize that it’s really a celebration of things we take for granted yet couldn’t imagine living without. And it’s a commemoration of the men and women who risked their lives, liberty, and reputations to secure them for us.

For instance, take the eight-hour workday, the current standard in the United States.¹

Everyone has different careers and work schedules. Some are incredibly demanding and long. Others are on swing shifts. But for many Americans, the day looks like this: get up, eat breakfast, and see children off to school. Go to work, break for lunch, work through the afternoon, and then head home in time for dinner. It’s a simple thing, this schedule. But it’s a schedule that enables us to keep our bodies fueled, hydrated, and rested. A schedule that allows for time to attend our loved ones’ school plays and soccer games. A schedule that affords more time for recreation, relaxation, and self-improvement.

But it wasn’t always this way.

The year was 1835. The location: Philadelphia. Throughout this enormous city – indeed all throughout the country – workers knew only one sort of workday.

They called it “sun to sun.”

The moment the sun crested over the horizon each day; tens of thousands of laborers were already at work. Shoveling coal. Laying bricks. Painting houses, driving carts, unloading boats, and a hundred other tasks. They would work, often under hazardous conditions and for little pay until the sun finally went down. During the summer, this could mean up to 15 hours per day, leaving them no opportunity to see their families or do much of anything. The winter workday, in contrast, was comparatively short – at around 9 hours per day – but it also meant an enormous drop in pay or routine unemployment. Neither situation was acceptable for someone trying to feed their family. To make matters worse, the toil of a sun-to-sun day led to a laundry list of physical ailments. Workers routinely suffered “swollen ankles, nervous headaches, lung disease, stomach problems,” and much, much more.

Then, one day, a letter arrived from Boston. The city that helped launch the American Revolution was requesting help from the city that had declared American Independence. Laborers there – primarily carpenters, but soon masons and stonecutters, too – were done with this unfair system. They were demanding their rights as workers, citizens, and human beings for something better.

We have been too long subjected to the odious, cruel, unjust and tyrannical system which compels the operative mechanic to exhaust his physical and mental powers. We have rights and duties to perform as American citizens and members of our society, which forbid us to dispose of more than ten hours for a day’s work.²

Essentially, Boston workers were calling for a citywide guarantee of a 10-hour workday regardless of the season. And they were asking laborers in other cities to call for the same thing.

The letter quickly gained traction in Philadelphia, circulating from worker to worker with astonishing speed. (These days, we’d call it “going viral.”) For them, the demands in the letter were not just about having more time off. They were about ensuring the means to become better citizens and more productive members of society. As the letter from Boston had proclaimed — and as the Philadelphia workers then repeated — “We have taken a firm and decided stand to obtain the acknowledgement of those rights to enable us to perform our duties to God, our country, and ourselves.”³ So, in May, three hundred coal workers decided to go on strike. Together, they marched on the coal wharves and announced that no coal would be unloaded until a 10-hour workday was established.

This was not an easy decision. For any worker to go on strike was to risk not just their current job, but their entire future. Livelihoods and reputations could be ruined forever if the strike was not successful – and up to that point in American history, few strikes had been. In many cases, strikes could lead to injuries and even death. Nevertheless, the coal workers were quickly joined by almost every other laborer and tradesman in the city. The words in the Boston letter became a topic discussion in every tavern and meeting house. Altogether, over twenty thousand workers began marching around the city, carrying banners that said, “From 6 to 6, ten hours work and two hours for meals.”

The movement was so organized, united, and swift that within three weeks, the old sun-to-sun system was out. The ten-hour day became standard throughout the city. In addition, many workers also gained an increase in their wages. But the movement didn’t stop there. The news quickly spread to every corner of the country, and by the end of the year, workers from New England to the Carolinas had conquered the old system. A system that “left no time for mental cultivation and kept people ignorant by keeping them always at work.”³ A system that was “destructive of social happiness and degrading to the name of freemen.”³ In its place was a new system. One that had “broken [people’s] shackles, loosened their chains, and made them free from the galling yoke of excessive labor.” ³

The rights won in 1835 laid the foundation for the rights we enjoy today. An eight-hour workday. The right to take vacations or medical leave. To care for our bodies properly. To see our families. To learn, live, and worship however we see fit. Rights we cannot live without…and which were secured for us by people who simply wanted a better future for themselves and their children.

And that, to us, is what this holiday is all about. We wish you a happy Labor Day!