What Will The Fed Do?

The Fed will be meeting this week and what we think will be very important is the verbiage that they use. Will the Fed decide to change the rates or not? Not only will they be making a statement about their interest rate policies, but they will also be making a statement about their opinion of the current U.S. economy. While the market has a one-in-four chance to cut this week during the Wednesday announcement, the next meeting is in July which is not that far down the road. Not a lot in the economy can change in that short of a time period so, if they say they’re going to cut rates, it looks more likely that they will cut rates in July. Does that mean the economy is currently in a bad position when you really look at international issues and make a comparison? On Thursday this week, the bank of Japan and the bank of England will announce their decisions. Currently, our Fed fund rate is been between 2.25%- 2.5%. The bank of England’s current rate is 0.75% and the Bank of Japan’s is -0.1%. Our Fed has a lot of wiggle room to bring rates down a good bit before it catches up with its counterparts overseas. This proves how much stronger our economy is than the overseas markets. The market clearly expects that the Fed will cut rates once, if not twice this year and it is already June so we’re running out of time before years end. Overall, it depends on how they say they will make the changes and why.

The Corn Market

We talked last week about the weather and how it can impact the markets. We also addressed how corn and soybean production in the U.S. has gone down dramatically because of the weather. There are still millions of acres unseeded in a $51 billion corn market. They’re expecting the smallest corn harvest in the last four years. Now, that could have been an even longer record if technology hadn’t evolved to the point where they can grow crops at a quicker pace. The forecast shows more rain coming which could cause even more issues. Corn prices have gone up, but your farmers can’t benefit because they’re not putting crops in the ground. The price hike isn’t from production, it’s from the lack thereof. This is a big deal and the slowdown has rolled over to other individuals such as the truckers that carry the corn as well as people selling equipment and herbicides to the farmers. This has caused a huge ripple effect across the country. Increasing the prices on corn is bad because corn is in a lot of things. Corn is used for feeding animals and in turn the shortage causes beef and pork prices to go up. Corn is now in our fuel so those prices could rise as well. The American Farmer, the corn producer, isn’t getting the benefit of the increase because prices are going up due to the lack of growing and selling corn. This could be bad and cause the Fed to look at this. Can the Fed cut rates in the face of rising inflation? You have a hot summer coming up and if you have an early frost right after, that could throw more of a problem into the mix.

Consumer Impact

The corn issue is going to make things more problematic for the Fed this week because we’ve been living the last year or two on better manufacturing numbers and housing. Those have been a little bad lately though and the consumer went back, last week, to what they did in May and the first couple of quarters of this year. Not only was retail spending up nicely, but it was also broad-based. The spending was spread out over gas stations, electronic stores, restaurants and much more. Now in terms of the Fed cutting rates, the retail side of things have been forgotten. The American consumer reports can be inflationary much like the crops are. When you look at retail sales, it shows that they’re going to have to deal with a lot more than one thing during this Fed meeting. This situation seems a lot like 1995. We’re not looking at a rate cut because the economy is bad but simply just anticipating a soft landing. In 1995, that was one of the few times the Fed has executed a soft landing properly. If we can pull off a 1995 scenario again, we will be in good shape. I think people remember fondly the years between 1995 and 2000 when the economy turned over. It was not a bad time period at all for the Fed. If the Fed can cut rates, not because the economy is doing badly, but because they overextended on the upside, then we think it will be very good for market, stocks and the overall economy. These consumer numbers may push off the rate change until later in the year, potentially as late as September.

 

Bobby Norman, CFP®, AIF®
Senior Vice President
Wealth Consultant
Email Bobby Norman here

Ashley Page, JD, MBA
Senior Vice President
Wealth Consultant
Email Ashley Page here

Trey Booth, CFA®, AIF®
Senior Vice President
Wealth Consultant
Email Trey Booth here

Adam Vansant
Associate Vice President
Wealth Consultant
Email Adam Vansant here

 

Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Economic forecasts set forth in this presentation may not develop as predicted.

No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.

Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.

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