Uncertainty and Interest Rates
We’re at an inflection point for the economy as well as interest rates. There are mixed messages everywhere. Investors are often looking for clarity and an opinion that is provided with certainty about where the economy and interest rates are headed. The truth is, at this moment in time there is so much uncertain and conflicting data, it’s really impossible to say.
Our likely case scenario is that interest rates are not going to fall and that tariffs, as well as tax cuts, will cause inflation to rise. For that reason, we do not expect the Federal Reserve to be active in attempting to reduce interest rates further. This is not necessarily a negative for equity and bond markets. The good need is that higher short-term rates provide some relief as money market yields and short duration fixed income assets finally pay a reasonable rate of return.
As long as rates do not significantly rise, we believe the economy is on reasonably solid ground. An unexpected spike in inflation could derail this perspective. We are continuing to monitor data very closely.
Jeff Cox at CBC recently drafted an article highlighting the recent testimony by Federal Reserve Chair Jerome Powell. His comments were not surprising and essentially outlined a wait-and-see perspective that the Fed will follow. They are hesitating to make a prediction on uncertain and incomplete data just as we are. Excerpts are listed below.
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“Federal Reserve Chair Jerome Powell on Tuesday reiterated the central bank’s commitment to bringing inflation down and signaled that policymakers aren’t in a rush to push interest rates lower.
In remarks before the Senate Banking Committee, Powell called the economy “strong overall” with a “solid” labor market and inflation that is easing but still above the Fed’s 2% goal.
With those conditions prevailing, he said the Fed doesn’t need to move quickly to ease monetary policy.
“With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance,” Powell said. “We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment.”
Powell’s comments came in the first of two appearances this week on Capitol Hill. He speaks to the Senate Banking Committee on Tuesday then the House Financial Services Committee on Wednesday.
Stocks briefly dipped following his opening statement but were little changed after two hours of trading.
Much of the proceeding focused on bank supervision rather than monetary policy.”
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