Federal Reserve Impact on Markets

The Fed has taken a significant step by officially initiating its cutting cycle, which holds profound implications for the financial world. ⚠️The #FOMC has cut the FFR by 50 Basis Points to a 4.75%-5% Range. ⚠️The latest projection of the Neutral Rate, R*, came in at 2.8% versus the previous estimation of 2.9% A cutting cycle might affect other central banks' stance on monetary policy because the US Dollar could devalue considerably going into 2025, making exports from other countries like Japan more expensive. For the past two weeks, business media has made a huge story out of a 25—or 50-basis point cut, but in my opinion, today's decision on the magnitude of the cut is meaningless. Financial conditions have eased considerably since July, so it should not be a surprise that the US economy might have already started to re-accelerate. The Atlanta Fed GDPNow is flashing a Real Growth Rate of 3% for the US Economy. If that materializes, it would mean that the US #Economy is already running 1% above its potential. Why financial conditions have already started to ease? Here are some examples: ✍️Mortgage Rates decreased from 7% in July to 6.15% today ✍️The 2-Year Yield decreased from 4.75% in July to 3.63% today ✍️The 5-Year Yield decreased from 4.06% in July to 3.47% today ✍️Housing Starts have picked up momentum What market participants have priced out is a resurgence of inflation during 2025. That scenario is entirely possible if the Dollar Index drops below 100. A cheaper dollar will make commodities and import prices more expensive for the US consumer, and a reduction in real income could squeeze even more of the low to middle class into the USA. Considering the decrease in US Treasuries for the past two months, I find US Government Bonds expensive across the yield curve at these levels. I think R* is well above what the Fed estimates because of factors like de-globalization, the reshoring of strategic industries, and increased protectionism. The terminal rate post-pandemic is between 3.5% and 4%, in my opinion, and that is where I think this cutting cycle will end. If I am proven right, bond investors must reprice government bond yields higher. How do we play a potential increase in inflation in a no-landing scenario? I tilted my portfolio as I outline here below: 👉Tilt the portfolio to over-weight energy and miners. 👉Have a marginal exposure to Gold and Silver. 👉Favor TIPs over US Treasuries 👉Increase allocation to US Value Stocks and International Stocks. 👉Lock-In US Investment Grade Credit at the belly of the yield curve where we can still get 4.8% to 5% yields, especially on issues at the Single-A Rating Enjoy the ride! #Finance #InterestRates #Economy #Investing

…It has begun. Over the last year, I have made the strongest possible case for the Fed to be proactive. Rates should have been cut this week – indeed, the rates should have been cut in January. We have seen this movie before. The Fed was very late to take inflation seriously in 2021. They brushed it off as “transitory”. However, it seemed obvious that inflation was surging. Real-time shelter inflation was increasing at a double-digit rate. Shelter has the largest weight in the CPI. Shelter operates with a lag. Hence, it was easy to forecast the surge. The Fed was forced to react after the damage was done. The same mistake has been repeated – despite many warnings. The recent CPI print was 3% year-over-year (YOY). Nearly two thirds of this print was driven by one component – shelter. Shelter inflation is reported at 5.2% YOY. This number is far from reality. For example, Apartmentlist.com rents are running -0.8% YOY - a full 6% below the official CPI number. Suppose we believe the real-time shelter inflation is 2%, not 5.2%. This means the real-time CPI would be 1.8%. If you believe shelter is 3%, then real-time CPI would be 2.2%. These numbers are well within the Fed’s target. The Fed prides itself on making data-driven decisions. However, it is unwise to make decisions based on stale data. The shelter inflation happened in the past. Keeping rates high will not impact what happened last year. It is always best to look at forward-looking indicators for policy decisions. ·      My yield curve indicator has been inverted for 20 months. It is 8 of 8 with no false signals since the 1960s. The maximum historic lead time has been 23 months (before the great recession). Ignore it at your own risk. ·      The Sahm Rule has been triggered. This indicator is not necessarily predictive because employment moves with the business cycle – but it is useful in telling us whether we are in a recession or not. We know that hiring has slowed and unemployment has risen – though the absolute rate is still relatively low. ·      Retail sales are highly correlated with personal consumption expenditures. Retail Sales are flat. Many do not realize that Retail Sales are not inflation adjusted. Taking inflation into account recent sales growth as well as YOY sales are negative. ·      There is considerable evidence that COVID-era savings have been drawn down. A recent release from Philadelphia Fed carried the headline: “Share of Delinquent Credit Card Balances Reaches Series High”. (The same report shows an alarming plunge in mortgage originations.) People are paying 20%+ interest on a card because their savings have run out. Indeed, if people are cutting back on fast-food expenditures, you know this is serious.  Drawing down the savings has fueled consumption expenditures over the past two years. That source of growth has ended. Now the Fed will have to play catch-up and cut by at least 50bp in September. Any recession is a self-inflicted wound. 

🔻 The consumer is blinking This morning’s #retail sales data reinforced a message: the US economy is softening. Retail sales were weak in nominal terms and negative in real volumes, pointing to consumers pulling back as price sensitivity rises. The pattern remains K-shaped: higher-income households continue to spend, while middle- and lower-income families are becoming visibly more cautious heading into the holiday season. 📉 Margin pressure is building The producer price index (PPI) indicated wholesalers and retailers are increasingly eating tariff-driven cost increases to hold the line on prices. This margin squeeze is subtle but real—and likely to intensify as demand cools further. 😟 Expectations are sliding toward decade lows Consumer psychology is deteriorating. The Conference Board index fell to 88.7, with expectations dropping to 63.2—a level now flirting with its lowest readings in a decade. Households are concerned about weaker prospects for jobs and income, with inflation, tariffs, and politics amplifying the uncertainty. ⚠️ Early labor signals aren’t reassuring The ADP private payroll weekly pulse is still a young indicator, but directionally it points toward emerging job losses as we approach year-end. That aligns with a broader narrative: the labor market is cooling more materially than headline data imply. 🏛️ For the Fed, today’s mix argues for easing—but it will be a very close call. Labor-market softness is becoming more visible, consumer caution is firming, and inflation pressures are uneven across sectors. Taken together, the macro environment is shifting toward one where a rate cut would be optimal to cushion the downside risks to employment. However, the decision in December will hinge on how Chair Powell balances downside risks to employment against upside risks to inflation.

These days, you don’t need to look further than the stock market for your daily dose of cortisol. Today was one of the Fed’s eight annual meetings, where Jerome Powell plays head chef and the market anxiously waits to see what’s on the fiscal menu (spoiler: it’s always hoping for rate cuts). So, what did Powell serve up? ❌ No cuts. Rates hold at 4.25%-4.5%. 📉 Growth revised down. 2025 GDP forecast slashed to 1.7% from 2.1%. 📈 Inflation revised up. Now at 2.7% vs. 2.5% prior. This should have been a net negative for markets - slower growth, higher inflation, no immediate relief. Then why did the stock market rally? Because macro is all about reading between the lines and disappointment is relative. ▪️No cuts ≠ No cuts ever. The worst-case scenario was Powell coming out and saying inflation is too sticky, and cuts are off the table for 2025. That didn’t happen. Instead, he played the patience game, which investors took as a sign that cuts are still coming - just not yet. ▪️ Less aggressive tightening. The Fed announced it will slow the pace of its balance sheet runoff, meaning more liquidity stays in the system. More liquidity means more support for asset prices. ▪️ Expectations vs. reality. Markets were bracing for worse. The fact that Powell didn’t sound more hawkish? A relief rally. ▪️ Slower growth = more pressure to cut later. The worse the economy looks, the sooner the Fed will be forced to act. So, ironically, bad news today makes future rate cuts more likely. Today’s rally is all about optimism that rate cuts are still in play, liquidity won’t dry up as fast, and Powell is keeping his options open. At some point, something will have to give. Will it be the Fed’s commitment to higher-for-longer, or the market’s faith in eventual rate cuts? The next few months will tell us who blinks first.

July’s employment report from the Bureau of Labor Statistics should give the Fed the exclamation point they have been looking for to show that the economy is slowing enough to warrant a rate cut. Market expectations have shifted firmly to a 50-bps interest rate cut at the Fed’s meeting in mid-September, rather than a 25-bps cut which had been the prevailing view prior to this report. Now handwringing will ratchet higher as to whether the Fed is in the process of successfully orchestrating a soft landing or if they have waited too long to shift their monetary policy stance. Job growth slowed more than expected in July and gains in May and June were revised lower. The unemployment rate increased 20 bps during the month and is up 60 bps over the past six months – unemployment rate changes of 50 bps or more over a six-month period have typically corresponded with recessions (see accompanying chart). Wage growth also appears to have slowed over the past couple of months. Even allowing for some volatility in the monthly data, the three-month moving average in employment growth and unemployment show an undeniable softening. Unemployment insurance claims add further evidence to the slowing trend. Initial unemployment claims have ticked higher over the past three weeks and continuing claims are at their highest level since the fourth quarter of 2021. It is difficult to call current labor market conditions weak with the unemployment rate still at 4.3%, but job gains appear increasingly lackluster across major employment sectors and the loss of momentum is undeniable. Stock and bond market participants are reacting in a way that suggests increased recession fears. Earnings reports have only fueled these concerns. The 10-year Treasury rate has fallen materially below 4.0%. Mortgage rates have also been ticking lower, which is good news for prospective home buyers. Rate cuts appear to be on the way, but macroeconomic conditions are increasingly precarious and the Fed’s September meeting may start to feel like a lifetime away if more bad news unfolds. The week ahead is not a busy one from an economic news perspective, but ISM services, mortgage delinquency, Fed Senior Loan Office Survey, and jobless claims, among others will be interesting to watch for additional information on the economy’s trajectory. What indicators are you watching for?

Rate-Cut Chatter… Real-World Decisions. Inflation cooled enough that markets now see a September Fed cut as highly likely (most pricing a 25 bps move), while some are calling for a “jumbo” 50 bps start. Treasury Secretary Scott Bessent floated the idea this week on Bloomberg, though several Fed watchers warn a half-point would look “panicky,” and policymakers say more data still matters. ⚠️ Why this matters for founders: cheaper capital can be a tailwind, but not a strategy. Use the rate debate to sharpen your playbook: 🔹 Plan for three scenarios, not one. Baseline: 25 bps cut. Upside: 50 bps. Tail: no cut if incoming data re-heats. Pre-decide how hiring, capex, and financing change under each path 🔹 Sequence capital, don’t spray it. If the cost of capital dips, rank uses by time-to-cash-flow & risk: - Extend runway / refinance expensive debt - De-bottleneck production / GTMs already working - Fund new R&D bets with explicit stage-gates 🔹 Discipline matters. Assume today’s easing can reverse; design projects to clear hurdle rates that survive a rate back-up. 🔹 Strategic money > hot money. In easing cycles, velocity returns to term sheets. Prioritize investors who also deliver access: supply chains, distribution, co-dev. (As a CVC, that’s where we lean in with our TDK Goodness.) 🔹 Control the controllables. You can’t steer the Fed. You can tighten your unit economics, stress-test vendors, and stage scale-up so each tranche unlocks measurable productivity. Where I see teams applying this well: capital-intensive builders who treat rates as context, not a crutch. For example, Peak Energy (grid-scale sodium-ion) sequences manufacturing scale with supply resilience; Ascend Elements (domestic battery materials) links project finance to offtake sizing; Agility Robotics and ANYbotics time factory capacity to validated demand; Groq pursues efficiency-led AI inference economics that are less rate-sensitive than cloud-only scale. Different sectors, same discipline: earn your next dollar of capex with proof, not vibes. My take as an investor: welcome a cut, plan for less, execute the same. Easing can open windows for M&A, growth equity, and project finance… but it won’t fix poor sequencing. Decide now what you’ll accelerate on 25 bps, what you’ll only green-light on 50, and what you’ll never pursue. Then stress-test that plan with your board. 💬 Curious to hear your thoughts on this: https://lnkd.in/g-xFmqtD

The Fed is poised to cut rates for the first time in 4.5 years later today—what happens next? Looking at past rate-cutting cycles, the outcome for markets depends largely on whether we enter a recession or manage to avoid one. When the economy avoids recession, the S&P 500 typically rallies, posting gains of over 10% in the 12 months following the first cut. But if a recession hits, stocks have historically fallen by ~15%. This divergence highlights the importance of the Fed’s next steps and the economic backdrop. So are we heading for a recession? The yield curve inversion, typically a reliable predictor of recessions, has recently corrected. While this has reduced immediate fears, risks still loom large. With US interest expenses now exceeding defense spending for the first time in 65 years, fiscal pressures are mounting, raising the question—will the Fed focus on inflation, fiscal balance, or avoiding recession? If the latter becomes the priority, markets could face significant turbulence. Inflation remains a concern. While rate cuts might provide some relief to markets, inflation hasn’t been fully tamed. The recent MoM PPI numbers came in higher, and core CPI rose 0.3%, its largest increase in four months. With commodity price shocks still in play, cutting rates too quickly could reignite inflationary pressures, making this a delicate balancing act for the Fed. As we await the Fed’s decision tonight, the market’s path forward could hinge on whether the US economy stays resilient or if we face deeper challenges ahead. #Fed #RateCut #Recession #Expansion #Inflation #Investing #GlobalMarkets #USEconomy #MarketTrends

Do’s & Dots The Federal Reserve concludes its two-day meeting today, with markets virtually certain that rates will remain unchanged in the 4.25% - 4.50% range—marking the seventh consecutive month at this level. While the rate decision itself holds no surprises, traders are positioning for nuance. Bloomberg reports that savvy investors have taken long positions, anticipating Chair Powell will adopt a more dovish tone that signals future rate cuts. The real risk lies in the updated dot plot projections. A hawkish shift showing fewer anticipated cuts would likely disappoint both Fed watchers and markets, potentially triggering volatility despite the expected rate hold. Economic fundamentals suggest the Fed will eventually ease policy as growth moderates in the second half of 2025, down from the current 2% pace. The recession narrative has largely faded, with even previously bearish economists revising their outlooks upward. This shift reflects underlying economic resilience that has surprised many forecasters throughout the cycle. For the latter half of 2025, expect GDP growth to decelerate to a more sustainable 1% - 1.5% range—a pace that should provide the Fed with sufficient justification to begin cutting rates without signaling economic distress. When the Fed does resume its easing path, I expect: - Treasury rates to decline approximately 50 basis points over that year, with short-term yields leading the decline as the market prices in policy normalization. - Refinancing activity to accelerate across high-yield and broadly syndicated loan markets as credit spreads tighten and all-in borrowing costs fall. - Corporate earnings growth to initially slow alongside GDP deceleration, then recover modestly once Fed easing begins to support economic activity. - M&A activity to rebound significantly as companies that have been hoarding cash and preserving liquidity regain confidence to deploy capital. - Capital expenditure to increase meaningfully—a long-overdue development that's critically needed. - Housing market activity to strengthen as lower mortgage rates improve affordability and unlock pent-up demand. - Financial and technology sectors to outperform given their sensitivity to funding costs. - Credit market conditions to improve broadly, driving increased demand for private credit while reducing default risks across industry sectors.

What the May Fed Minutes Reveal About the Economy’s Fragile Balance Behind the pause is a central bank caught between rising inflation risks and a softening outlook. The Federal Reserve held interest rates steady at its May meeting. But the real story came today, when the Fed released the minutes from that meeting. They offer an unusually candid view into the uncertainty shaping monetary policy right now. The Fed’s job is to manage inflation and employment. It does that primarily by adjusting the federal funds rate (which is the short-term interest rate that influences everything from mortgages to credit cards to business loans). Raising rates cools inflation. Lowering them boosts growth. And when the Fed holds steady, like it has for three straight meetings, everyone wants to know what comes next. The answer, based on these minutes, is: they don’t know yet. But they’re worried. Fed officials now see risks mounting on both sides. Inflation remains elevated and could rise further as tariffs filter through the supply chain. At the same time, businesses are delaying investment and hiring decisions. Some are planning price hikes even if they’re not directly affected by tariffs, betting that consumers will accept higher prices in an already-inflated environment. That’s a red flag for the Fed, because price expectations are sticky. Meanwhile, the labor market still looks strong, but consumer sentiment is weakening. GDP declined last quarter, though the Fed attributes much of that to one-time trade distortions. Beneath the noise, their own staff now sees the probability of a recession as almost equal to the baseline forecast. And inflation is expected to rise this year before falling gradually through 2027. So what does this mean? The Fed is not likely to cut rates anytime soon. They want to preserve optionality. But they’re also increasingly aware that waiting too long could tighten financial conditions at exactly the wrong time. If inflation runs hot for another month or two, expect the pause to extend well into 2026. But if labor markets start to crack or consumer spending stalls, the Fed may act sooner than markets expect. Either way, businesses are operating in a high-stakes environment. Price sensitivity is rising. Cost inputs are shifting. And consumer behavior is growing harder to predict. The era of stable baselines is behind us. At Havas Edge, we’re helping clients navigate this uncertainty with strategies that balance short-term performance with long-term resilience. Because when the Fed pauses, the smart money starts planning for movement. #FederalReserve #InterestRates #InflationOutlook

How could the Fed’s 50bp rate cut impact the secondary market? The secondary market has shown remarkable stability and growth, which we expect to continue with the recent Fed rate cut. In H1 2024, secondary transaction volume exceeded $70 billion, a 73% increase from H1 2023*. Lower rates, coupled with the continued adoption by both LPs and GPs seeking liquidity, could lead to a record-breaking year. 1. Improved Exit Environment: Lower cost of capital should support M&A and potentially more IPOs leading to increased distributions for secondary investors. 2. Increased Supply: Supportive monetary policy may improve valuations for secondary investors and catalyze more sellers to strike while the iron is hot  3. Asset Quality: Lower cost of debt and broad macroeconomic improvement for portfolio companies should increase interest from secondary buyers looking for high-quality deals. 4. Pricing Impact: While lower rates may improve distributions and valuations, this, in turn, may lead to tighter pricing for secondary deals. However, increased pricing does not necessarily mean lower returns. Improving asset quality and better visibility to exits can support, or even increase, return expectations for secondaries. 5. Search for Return: Investor demand for the historically strong risk-adjusted returns delivered by secondaries is likely to grow as the cost of sitting on the sidelines increases. For more insights, read the recently published Secondary Market Update by our Secondaries & Liquidity Solutions team here at BlackRock. Learn more: https://1blk.co/3N4vyTw   *Source: Evercore H1 2024 Secondary Market Review #SecondaryMarket #FedRateCuts #MarketTrends #PrivateEquity