Everyone got really excited just a few days ago as the feds not only cut rates but they cut them by a massive 50 points or half a percent. Personally I was expecting no rate cut yet or just 25 points but this 50 point was a bit of a shock and now people are speculating on if more drastic cuts are coming in November.
For sure we are going to have to watch a few things to make an educated guess. Those things will be the jobs rate (which was inflated by a million new jobs in 2024 already which pretty much means new jobs was stagnate for all of 2024 lol the unemployment rate which honestly I'm not all that worried about anymore as I feel like things are shifting faster with AI now and overall inflation of everything and if we still see that stay the same or slowly move higher.
The last rate cut of 50 points really started to send things into a wild spiral. When rate cuts happen it often has a very positive affect on the markets as it's a signal that people and businesses will be able to get loans more easily. It often boosts stocks like REITs for this very reason as flow returns to those markets.
Since the rate cut was announced the US DOW has gone from roughly 41,500 to 42,000 but today has retracted back down to 41,930 at the time of writing this. Still a positive direction for the markets and honestly still blows my mind how high it is because just before covid lock downs the DOW was just below 30,000.
This is why you'll often hear investors say just get into index funds because if you did and held since just before pre covid you'd be sitting at a 56% gain in just 5 years time or a little over 11% per year plus the small amount of dividends roughly 1%-2% earned on top of that.
The fed has two target points but they are not required to ever hit them it's just a general rule of thumb and optimal conditions they try to get to. Those rates would be 2% inflation (which currently is sitting at 2.5%) and a unemployment rate of 4% which currently is sitting at 4.2%.
The other side of this is the the fed is also said to be continuously selling off their assets. They built one massive power sheet during the lock downs from 3.9 million to upwards of 9 million and will continue to sell off those assets back which currently sit at roughly 7 million.
Right now it's expected that the next two meetings which are all that's left for this year of a 25 point at each one further brining us down another 50 points of 2 % for the year which is rather aggressive. This 1% reduction would take us to 4.25% - 4.5% rate from the current 4.75% - 5% we currently have.
Still rather high but the bet is it will be high enough to curb the inflation and keep unemployment at a solid rate.
Now of course there are various other aspects that go into this. Global economy, wars, the USD now having competitive world currieries, crypto and more.
It's going to be important to watch these moves for the general economy moving forward. We could be in a period of time over the next few years where interest rates just remain higher. Compared to interest rates of near 0% after the 2009 recession which lasted for 5 years before rates started to slowly climb again just before the pandemic hit we can see that the economy really was set to be in a recession that never happened but it's a bit iffy on if things will swap or not.
So keep an eye on inflation, fed rates and unemployment rates. Combined they are going to give us an idea of where markets are going to go.
