Bad news can be good news, at least when it comes to the Federal Reserve and interest rates. Every time a crack appears in the otherwise solid labor market, as recent data indicated, it signals potential relief for central bankers. The worse the economy performs, the more likely officials are to reverse the tightening.
What makes this cycle unique is that the first rate cut is expected to respond to falling inflation rather than a rapidly weakening economy. Investors aren’t just hoping for some good news; they want it all. “Looking ahead, there is a real possibility of a very encouraging combination of lower inflation, lower interest rates, and healthy economic conditions,” said David Alcaly, lead macroeconomic strategist at Lazard Asset Management. This is the “soft landing” everyone hopes for.
Instead of dodging an imminent recession, the upcoming rate cuts could be the final ingredient in a successful economic recipe. Meanwhile, many investors are already benefiting. The stock market is hitting record highs, and savers and retirees are enjoying elevated interest rates with high yields on money markets and government bonds.
However, the wage and wealth gains enjoyed by many Americans may delay the Fed’s move to cut rates. Lower rates generally benefit those who earn from wages rather than interest, and the elevated rates have squeezed many parts of the economy. Consumer sentiment remains tepid. Lower rates would benefit mortgage seekers with lower monthly payments, and rising delinquencies on credit card and car loans continue to strain younger and lower-income households.
Stock market bulls anticipate that lower interest rates will make borrowing cheaper and enhance business investment prospects, driving the next market rally phase. However, as Myles Udland noted, rate cuts don’t always lead to stock market glory since they usually address underlying problems. Investors are willing to take that deal. The allure of lower rates is strong, given the current high rates.
With investors, mortgage-seekers, and others sensitive to high rates eagerly awaiting Jerome Powell and the Fed’s next move, the pressure for a soft landing is mounting. Yet, as Fed officials frequently remind us, it’s “higher for longer” until further notice.
