Lower Interest Rates On The Way!

In a widely followed press conference last week, Federal Reserve Chair Jerome Powell said the “time has come” to begin easing monetary policy. This is as close as he has come to declaring victory over post-Covid inflation, and it signals that the Fed will begin cutting interest rates very soon. Whereas short-term interest rates are about 5.3% today, we believe they could gradually dip toward 3.5% over the next 18 months.

Rates typically only fall this much if economic growth is in free-fall, inflation is resetting much lower, or both. In this case, we believe the Fed has changed its policy approach because inflation is largely back to normal and it sees a chance to engineer a “soft landing” for the economy.

In a CNBC interview, economist Jim Paulsen said the Fed announcement “opened up a lot more positive forces for the stock market.” He sees bond yields coming down, monetary growth speeding up, and continued healthy economic growth. These factors should result in stronger consumer and business confidence as well as a “broad market advance.”

Let’s hope so. The US manufacturing sector could really use a shot in the arm. Corporate capital spending (outside of AI) is rather weak, and high interest rates are the main culprit. Today we learned that durable goods orders soared nearly 10% in July, but unfortunately, much of the strength was confined to government orders for military aircraft. Stripping out aircraft and defense equipment, orders are up only 2% from a year ago.

Lower lending rates should also help the housing market. Over the past month, Bankrate.com’s average 30-year fixed mortgage rate has fallen to 6.8% from 7.2%. Investors and lenders are already anticipating Fed rate cuts. Bankrate predicts that rates will drift toward 6% by year-end. And with housing supply beginning to improve, we can expect to see stronger home-buying activity.