By Kyle Tetting
As the eyes of the financial world shifted again this August to Jackson Hole, Wyoming, their focus was on the changing language around interest rate cuts. Federal Reserve Chair Jerome Powell did not disappoint.
While it seemed old news by the time Powell’s comments went to print, the statement “the time has come for policy to adjust” solidified rate cuts for an already confident market.
Of course, I can’t help but bemoan the timing. With our annual client seminar on tap (We’d love for you to join us Oct. 1 or Oct. 9.), preparing remarks has become more challenging amid a fluctuating Fed. That said, the entirety of the Fed’s comments, at an economic symposium that was decidedly not a policy-setting meeting, pointed at direction – not magnitude or timing. Nuance is important, of course, but we didn’t need to hear Powell’s words to know the Fed was ready to pivot.
What became even clearer, though, is that the Fed has shifted focus. After the latest interest rate hike, in July 2023, the Fed pivoted from rate hikes to rate stability, recognizing that monetary policy had become restrictive enough to slow inflation. Despite some occasional backsteps, the rate of inflation has since slowed.
While a cut to the overnight lending rate would certainly reflect another pivot, even a few quarter-point cuts still leave monetary policy somewhat restrictive. Cuts would be meaningful, certainly, but the real change is the Fed’s new emphasis on employment.
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Powell’s comments at Jackson Hole referring to unmistakable cooling in the labor market made clear that despite a dual mandate, the Fed remains singularly focused. It just shifted that singular focus from inflation to employment.
For my part, I think the pivot might be a little overdone. Sure, the unemployment rate ticked up to 4.3% in July, but measured another way, more people than ever are working.
Of course, despite record employment, consumers appear to be less frivolous with their spending. Can you blame them, though? With talk of lower rates, why borrow for big-ticket purchases like cars and homes now if rates might be a percent lower in a few short months. Further, with the higher inflation of recent years, consumers may have finally said enough to high prices on travel and entertainment after getting their post-COVID fill.
What I find most interesting about this “new normal” is how average it has become. Job growth appears back on a pre-COVID trajectory, and the unemployment rate is at precisely the level it averaged in the five years preceding pandemic shutdowns.
Beyond high-level employment data, more nuanced measures such as household debt service – how much the burden of debt places on household income – have moved back to pre-COVID levels after a period of historic lows. The pandemic caused meaningful disruptions in typical gauges of financial stress, but increasing early delinquencies on auto loans and credit cards only recently have pushed past pre-pandemic levels.
As we continue to reshape a post-COVID economy, not all of the old tools are going to be effective in measuring the current situation. But from what we’ve seen so far, Fed policy has done enough to allow this pivot in focus.
Amid another record run for stocks, albeit one with a few bumps along the way, I remain ecstatic about what we’ve come through. We’ll need to remain vigilant regarding the change ahead, especially given the higher prices on stocks, but that’s always the case.
Despite the occasional headline to the contrary, the balanced portfolio remains well positioned to dampen volatility. And what’s most encouraging amid the change is that we enter this new normal with bonds offering much more potential return than we’ve seen in years. Rather than solely the dampener of volatility, bonds are offering a chance for real returns.