Fed Seen Inching Closer to Rate Cuts as Election Looms

The Federal Open Market Committee meets this week for its last interest rate decision before the summer recess. While the universal consensus is that the Federal Reserve won’t touch interest rates this week, there’s a large and growing consensus that the September meeting will be the one where the Fed finally decides to start cutting interest rates.

If you’ve been watching the daily yield curve statistics, or have been buying T-Bills recently, you’ll have seen that yields on 3- to 6-month T-Bills have been falling in recent weeks as markets have begun pricing in the prospect of rate cuts.

Of course, we saw this last year too, when markets thought that rates would start getting cut in early 2024. And as reality set in, yields on T-Bills began to rise again.

But this time there seems to be a stronger case to be made for rate cuts, although it isn’t quite ironclad. Here are some of the reasons for and against rate cuts.

Key Takeaways

• Inflation figures are sending mixed messages
• Labor market is weakening
• Political considerations may outweigh economic considerations

Reasons Against Cutting Rates

1. Consumer price inflation is still higher than desired
2. PPI and PCE are running higher than expected
3. GDP has surged higher

One of the biggest reasons not to cut rates is because consumer inflation remains elevated. While it has been falling back in recent months, has it really reached the sustained momentum towards 2% that the Fed says it needs in order to cut rates?

Additionally, the Fed looks to other measures of inflation as well. The producer price index (PPI), for instance, came in hotter than expected last month, at 2.6% year on year, higher than the 2.3% that had been forecast and the 2.4% from the previous month.

Often the rise in PPI presages a rise in CPI, as what producers pay will eventually get passed on to consumers. So the fact that PPI is increasing doesn’t bode well for the future of CPI.

There’s also PCE, personal consumption expenditures, which the Fed uses as a gauge of consumer spending. It too came in hot last month, rising 2.6% versus the 2.5% that had been forecast.

If consumer spending is growing faster than expected, it would normally indicate that the economy is doing well or even running hot. That undercuts the case for rate cuts.

Of course there’s the obvious argument that much of that spending may be fueled by rising debt. But even if that’s the case, that’s not the only surprising number.

Gross domestic product (GDP) also rose significantly in the 2nd quarter, with the initial print at a 2.8% rate of growth versus the 2.0% that had been forecast.

But was that actual growth or cooking the books to make the economy look great to bolster Democrats’ chances in the election?

The danger now is that statistics could be massaged to make things look better than they actually are. And while that may help the Democrats get more votes in November, it could lead the Fed astray if the Fed relies on that data.

Reasons For Cutting Rates

1. Inflation coming down
2. Labor market weakening

The primary argument in favor of cutting rates is that the Fed has made a lot of progress against inflation so far. While inflation still is nowhere close to 2%, the Fed may decide that it has to tolerate higher inflation for some period of time.

Fed officials were already saying that back in 2020, when they said that they would allow inflation to run “moderately” above its 2% goal for some time. Of course, they let inflation run away quite a bit more than they intended, and it’s been tough to get that horse back into the barn.

But with headline CPI falling again, the Fed can now somewhat plausibly say that it has been able to bring inflation under control. And with two more inflation reports coming out before the September FOMC meeting, if inflation falls further in those two releases then the case for rate cuts becomes stronger.

The other factor that the Fed has to look at is the softening labor market. The hot job market of the post-COVID era, with workers quitting in record numbers to look for greener pastures, seems to have come to an end.

Layoffs are growing, the unemployment rate is increasing, and the only hiring seems to be at the lower end of the wage ladder. Many people forget that the Fed’s dual mandate extends to both inflation and employment, so that the Fed is going to be looking at both the labor market and inflation.

If the labor market weakens even more before September, the Fed may feel forced to step in and cut rates regardless of what inflation has been doing. And that may mean that inflation would remain higher than the Fed’s 2% target for some time to come.

How This Impacts You

With a potential rate cut coming in September, it’s time to start thinking about how to position yourself once that happens.

Many American savers and investors have enjoyed the past couple of years of higher interest rates. Parking money in a high yield savings account, money market account, or in US Treasury securities has yielded more than 5% interest relatively risk-free.

But all of that could be coming to an end soon once rate cuts start. And if the Fed starts to cut aggressively to forestall recession or once a recession occurs, we could be back to near-zero interest rates quicker than we realize.

Aside from the negative aspects of no longer having easy, high-yielding assets to park your money in, there’s also the potential negative aspect of recession. And if you haven’t prepared yourself in advance, you might get caught flat-footed.

Many Americans have already taken steps to protect themselves with gold and silver. Gold and silver have served as safe haven assets for centuries, maintaining their value through both good times and bad.

It’s often during tough times that demand for gold and silver rises, along with their prices. During the stagflation of the 1970s, for instance, gold and silver prices rose at annualized rates of over 30% per year.

And during the 2008 financial crisis, gold nearly tripled from its 2008 lows to its 2011 high, while silver more than quintupled. Many Americans who have bought gold and silver in recent years hope that gold and silver will repeat that kind of performance during the next recession.

If you want to try to protect your financial security with gold and silver, you can do it relatively seamlessly. Direct cash purchases of gold and silver can be made quickly, and can be delivered straight to your door.

If you have retirement savings in a 401(k) or similar account that you want to protect with gold and silver, you don’t have to take a tax hit to do it. With a gold IRA or silver IRA you can roll over funds from 401(k), 403(b), TSP, and similar retirement accounts tax-free into a precious metals IRA and use those funds to purchase physical gold and silver coins and bars.

No matter how much you’ve saved or how much longer you plan to save, if you want to protect yourself with gold and silver there are options available to you. Call Goldco today to learn more about how you can protect your financial future with gold and silver.