The Federal Reserve is on the Clock

Marc Zabicki (00:00):

It appears capital markets are coming back around to the idea that federal reserve rate cuts are indeed on the table for the last three Federal Open Market Committee meetings this year. Right now, the market appears to be pricing in rate cuts in the September and December meetings, while the October meeting looks to be about 50 50 in this latest edition of LPL Street View, while the Fed is no doubt data dependent about how it is viewing the prospect of rate cuts, we'll touch on two primary variables that may affect how FOMC members are thinking about Fed funds rate policy in the months ahead.

Marc Zabicki (00:39):

The first variable is inflation. We have been adamant that inflation concerns around tariff policy have been overdone, and recent inflation data seems to bear that out. While tariff effects have not been fully felt in this economy and some near term uptick inflation is expected, we are not anticipating tariffs to sustainably derail what has been a downtrend in inflation. Three of the primary reasons for that are in fact, number one, tariffs will not be solely born by the consumer. Number two, the increased use of technology in this economy is in fact disinflationary. And number three services inflation is the largest overall component of inflation, a component that will likely not be materially exposed to tariff policy. Notably recent personal consumption expenditure and consumer price index data seem to show that inflation concerns around tariffs have been a bit overdone. The second variable is no doubt the jobs market.

Marc Zabicki (01:40):

We will get more information from the payrolls report on September 5th, and that report could impact how the Fed thinks about policy. But broadly, there are signs. The jobs market is in fact cooling off. Non-farm payrolls have been on a downtrend. The ISM services and manufacturing employment components have been weaker and several data points indicate a slight rise in job cuts while job openings continue to fall. While the jobs market is not under any outsized pressure at the moment, the weakening conditions have no doubt caught the fed's attention. Looking ahead, we do expect to see at least two fed rate cuts in the latter part of this year, and we could see several additional cuts in 2026 as well. Some point to tariff policy as the primary reason for economic slowing and likely fed action. We think that view is somewhat misplaced. While yes, tariff policy has caused some economic decision makers to pause or slow their economic activity, what is perhaps more important is that we are witnessing an economy that is naturally slowing from the distortion of record post COVID stimulus programs. So regardless of tariffs, seeing this economy revert to the mean and providing some incentive for the Fed to step in should in fact be no surprise. We believe the ebb and flow of business cycles likely still exist. That likelihood should have ramifications for you as you manage investment return, but also ramifications for how you manage risk as well. Thanks for listening, and as always, allocate wisely.