A Reality Check for Future Rate Cuts
The Weekend Edition is pulled from the daily Stansberry Digest.
The Fed's latest message...
As was widely expected, the Federal Reserve lowered its benchmark lending-rate range by 25 basis points on Wednesday afternoon to between 4% and 4.25% – its first rate cut in nine months. Then it gave investors more of what they typically like to hear...
More juice is on the way soon.
In their quarterly economic projections, the central bankers said they expect the federal-funds rate to be another 50 basis points lower by the end of the year. Presumably that means two more 0.25-percentage-point cuts at its final two meetings of 2025.
Not only that, but the Fed members think inflation will be running "hot" – and expect to cut rates anyway. Fed Chair Jerome Powell said the Fed is looking to cut rates because of a "moderation in growth" and a "slowdown in consumer spending," and warned that the "downside risks to employment have risen."
As we'll explain, it's still unclear how fast or how far the Fed will cut rates. But even the expectation of further rate cuts has been putting pressure on one corner of the market...
The Fed's Employment Outlook Points to Interest-Rate Cuts
The labor market is the biggest concern now...
This meeting was one where the folks at the Fed publish their quarterly Summary of Economic Projections. This includes outlooks for GDP, inflation, and the labor market for the rest of the year and the years ahead.
Forget for a moment that these projections are almost always wrong. Wall Street cares about them anyway for the insight they provide into future Fed policy.
This time, the Fed members are projecting 1.6% GDP growth for 2025, a 4.5% unemployment rate (higher than it is now), and 3% inflation (which Powell said can still be influenced by tariffs). All the while, they're saying to expect additional rate cuts by year-end.
Wednesday's move is "a risk-management cut," Powell said, while acknowledging it's not "obvious" what to do with policy. But clearly, the labor market is what Powell and other Fed members think should be addressed.
As he said in his press conference's opening statement...
Payroll job gains have slowed significantly to a pace of just 29,000 per month over the past three months. A good part of the slowing likely reflects a decline in the growth of the labor force, due to lower immigration and lower labor force participation.
Even so, labor demand has softened, and the recent pace of job creation appears to be running below the break-even rate needed to hold the unemployment rate constant.
So the Fed expects to cut rates because of a weakening labor market... even while inflation remains "hot" and above its supposed 2% target. Our "higher prices" radar is going off right now, but so is the outlook for the economy in general.
We'll see how the market digests all this new information moving forward.
Differing Rate-Cut Opinions at the Fed
Politics obviously impacted this meeting...
It's the first Fed meeting for the freshly appointed member Stephen Miran, chairman of the White House's Council of Economic Advisers, whom President Donald Trump nominated to fill a seat that opened last month. He joined dozens of other central bankers, including Lisa Cook, whom Trump wants to fire over allegations of mortgage fraud.
Success in firing Cook would mean a majority of the Fed voting board would be Trump appointees. That makes it more likely the Fed would implement the rate cuts Trump has pushed for, while calling Powell "too late" to make the change.
Miran dissented from the majority opinion and was the only one of the 12 Federal Open Market Committee members to vote for a larger 50-basis-point cut. He assuredly also was the lone dot on the Fed's "dot plot" to say that the federal-funds rate should be at 3% at year-end.
The others said no lower than 3.5%, generally anticipating the fed-funds rate falling to 3% only in 2027. Some even think rates won't go any lower this year, so there was a wide range of opinions.
Why Trump Is Pushing for Lower Rates
In his calls for rate cuts, Trump has cited a few different factors...
The first has been the government's debt... Rate cuts would help the government refinance its debt at a lower rate and save money on interest payments.
He also has his sights on a cornerstone of the economy – housing...
In July, Trump said the Fed was "choking out the housing market" by keeping rates too high. And in a post on Truth Social in August, he wrote that "people can't get a Mortgage" because of Powell.
That's because when the Fed started to raise interest rates in 2022, the average 30-year fixed mortgage rate moved higher as well. It reached a 23-year high near 8% in 2023.
In short, high mortgage rates, coupled with record-high home prices, have made monthly payments for a home more expensive than ever. The average monthly mortgage payment has nearly doubled over the past five years, according to Nick Gerli of the housing data app Reventure.
Folks are struggling both to afford new mortgages and repay their current loans. Data from Google Trends shows that folks have recently been searching for "help with mortgage" at the highest rate since 2008:
When the Fed cuts rates, mortgage rates typically come down. And that makes housing more affordable by bringing down the monthly payment.
Now, this doesn't always happen. Last September, when the central bank lowered its fed-funds rate by 50 basis points, mortgage rates actually rose. Mortgage rates most directly track longer-term Treasury yields, which took off as inflation expectations grew.
Lately, though, mortgage rates have been moving lower. That may be a signal that the market has gotten less worried about inflation and believes the Fed is doing the "right" thing by lowering rates amid a weakening labor market.
On Wednesday morning, the Mortgage Bankers Association announced that the average 30-year fixed mortgage rate has fallen to 6.39%. That's its lowest level since last October.
Cutting rates even further from here should put even more downward pressure on mortgage rates.
Now that the Fed has cut rates...
On Wednesday night, Joel Litman – the founder and chief investment officer of our corporate affiliate Altimetry – went live with a new special briefing.
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Our own Whitney Tilson, lead editor of Stansberry's Investment Advisory, was so impressed with this opportunity when he heard about it that he joined the event on Wednesday night.
Joel and Whitney are also sharing four free stock recommendations – two to buy and two to avoid – for everyone who tunes in.
If you missed this briefing, you can watch a replay or read a transcript of the event here. But hurry – this briefing will go offline soon.
Good investing,
Corey McLaughlin with Nick Koziol
Editor's note: Joel has devoted his 30-year career to discovering hidden moneymaking anomalies in the market... And he just teamed up with Whitney Tilson to expose an anomaly that could help you see potential gains of 200%, 500%, or even 800% in the next year. That's why, today, he's urging readers to make one move immediately – before earnings season begins.