Wall Street on Friday notched a three week win streak after investors finally received an interest rate cut from the Federal Reserve. Stocks still ended lower on Wednesday but recovered, and that was largely due to Fed Chair Jerome Powell’s comments during the press conference where called the 25 bps cut a “risk management” move, sparking concerns that this would not be the start of a long policy easing cycle.
Federal Reserve Bank of Minneapolis President Neel Kashkari said he supported the US central bank’s decision to lower interest rates this week and penciled in two additional cuts this year. Kashkari said the risk of a sharp increase in unemployment warrants the committee taking more action to support the labor market. He characterized this week’s cut and any coming reductions as “insurance” to keep the labor market from falling dramatically while inflationary dynamics play out.
For the week, the S&P 500 index added 1.2%, while the Dow gained 1.1%. The Nasdaq advanced 2.2%.
Future Wealth’s View
There’s no shortage of headlines these days about how much Wall Street loves rate cuts. While Wall Street celebrated the interest rate cut pushing all the indexes to all time highs, the essence of Fed Chair Powell’s commentary was largely missed by investors – “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,” Powell told reporters in his press conference. He added, “Of the 2.9% inflation reading, 0.4% can be attributed to tariffs”.
But, the Fed believes the economy will grow through 2028. In June, their change in GDP estimate for 2025 was 1.4%. Now, it’s 1.6%. It’s even rosier for 2026: 1.8%, rising to 1.9% in 2027. Furthermore, the Fed expects unemployment to fall from 4.5% now to 4.2% in 2028. Yet, it is cutting interest rates, something that usually happens during a recession. The Fed’s answer is that it sees inflation declining to 2% by 2027-2028. Our view at Future Wealth LLC is that reality could be quite different – we expect inflation to climb above 3% and unemployment to rise from current levels and we simply do not see a path to 2% inflation levels over the near term.
After Donald Trump’s unprecedented attacks on the Fed, replete with months of nonstop schoolyard insults directed at the Fed Chair and summarily firing Fed Governor Lisa Cook, one has to wonder if the Fed is veering off economic fundamentals and falling prey to Trump’s bullying as many of his cabinet members have and continue to acquiesce to his whimsical ideas.