The Federal Reserve Has Spoken. Is Anyone Listening?

The Real Estate Espresso Podcast

The Federal Reserve Has Spoken. Is Anyone Listening?

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The Fed Has Spoken. Is Anyone Listening?

Welcome to my blog. I am Victor Menasce, host of The Real Estate Espresso Podcast. Today, we will delve into the Fed’s recent rate announcement, examining its influence and repercussions on the market.

Deciphering the Fed’s Message

The Federal Reserve, while often considered overpowering, wields significant influence on market sentiment in complex ways. The Fed’s chief Jerome Powell, in his recent declaration, stated that the Federal body has been consistent in making considerable headway in their dual goals of maximizing employment and price stability.

In meetings over the past two years, the Fed Chairman has repeatedly underscored inflation, creating a narrative of the economy rather than forecasting it. The question that arises is – are we truly understanding the signals sent by the Fed?

The Case for Lowering Rates

What intrigued us during the Q & A session was Powell discussing a potential scenario to support a future rate cut. With inflation expected to continue trending downwards, and if economic growth remains robust with low unemployment, lowering rates could be an option. However, he carefully avoided any direct mention of the recession, the r-word.

Despite positive number crunching, the committee wants to see more positive data before gaining confidence that the readings are not merely seasonal effects. Numerous analysts, including insiders like a former vice-chair and economist of the Federal Reserve and an advisor to Richard Fisher, president of the Federal Reserve Bank of Dallas, express a similar sentiment that holding rates higher is a huge mistake by the Fed. Do we need to pay heed?

The Impact of the Fed Funds Rate

The FMC sets only one interest rate, the Fed funds rate. It ultimately decides the rate that the Fed charges its member banks at the discount window and is directly associated with short-term treasury bills. However, bond yields significantly determine the yield of the paper issued by the US government and publicly traded bonds.

Parameter	What You Need to Know
US Government Bonds	The bond market decides the yield.
Short-term Treasury Bills	Tied to the Fed funds rate.
Fed funds Rate	Set by the FMC, influences the discount window rate for member banks.

Post the Fed announcement, we noticed a significant drop in bond yields. Two-year treasury, a benchmark for long term permanent financing for banks, agencies, and real estate investors, observed a massive drop within a short time. The trend indicates bond market investors foreseeing lower rates ahead.

The Core PCE, Inflation and the Real Positive Interest Rates

The Fed monitors the Core PCE personal consumption expenditure inflation metric as their benchmark. Currently at 2.5%, slightly above Fed’s target, and with the Fed funds rate between five and a quarter to five and a half, we are looking at a real positive interest rate, establishing a restrictive territory. During 2021 and 2022, we experienced negative real interest rates. The currency devalued faster than the rate you could get in treasuries, a stark contrast to the current scenario.

Indicators Pointing towards Economic Contraction

Though corporate measures suggest a strong economy and low inflation, we must note the indicators showing economic contraction, evident in the goods economy, big-box stores, rising unemployment, and falling job openings. The current robust economy narrative does not align with the corporate perspective and normalization witnessed on the Main Street.

Conclusion

The FMC maintained stable rates in this week’s meeting, while the bond market forecasted otherwise. Despite the 19 members of the FOMC, the bond market holds more sway on rates. It leaves us pondering the effective communication and comprehension of the Fed’s strategies and decisions. Keep thinking, have a fantastic rest of your day, and make great things happen.