It's All Downhill From Here (9/3/2024)
Derivative Logic Inc.
Independent Interest Rate, Currency, Commodity Risk and Defeasance Advisors
In the latest Straight to Smart newsletter, "It's All Downhill From Here", we discuss how the interest rate landscape is shifting. The U.S. economy showed surprising resilience as Q2 growth was revised upward, driven by consumer spending, despite a drop in the personal savings rate. This split in the economy continues, with asset-owning households keeping spending robust, which in turn is delaying the need for significant Fed rate cuts.
Treasury yields continue their decline, with interest-rate cuts expected at the Fed’s upcoming meetings in September, November, and December. While the market anticipates these cuts, the Fed typically avoids making drastic moves like a 50 basis point cut unless faced with a crisis—think COVID-19 or the 2008 financial meltdown.
Attention has now turned to upcoming economic data, particularly the August jobs report, which will likely set the tone for rate cut expectations through the end of the year. While economic growth remains solid, it’s likely we’ll see smaller, slower rate cuts rather than rapid declines.
Looking ahead, market projections suggest that rates like the 3-month SOFR are on track to decrease over the next year. However, these projections are historically poor predictors, so caution is advised.
On a broader scale, recent revisions to Q2 GDP and the Fed’s preferred inflation gauge, the Personal Consumption Expenditures Index, suggest that the Fed’s battle with inflation might be nearing an end, with a 25 basis point cut on the horizon. The question now is how many cuts will be needed before the Fed considers its job done.
In the market, we’ve seen a rise in borrowers using interest rate swaps to manage risk, locking in rates on their floating-rate loans. If you’re considering a swap or need to renegotiate an existing one, reach out to our team for independent advice. It’s crucial to ensure that these moves actually mitigate your interest rate risks, rather than add to them.
As always, stay tuned for the latest updates on interest rates, market data, and strategic financial insights.
Thank you for listening and have a blessed day! I'm Dahlia Logan, Director of Communications for Derivative Logic, Inc.