In July, US stocks increased, while international stocks and bonds went down. This year, international stocks have outperformed, followed by US large-caps and bonds. US small-caps are slightly down.
Can interest rates be interesting?
On Wednesday, the Federal Reserve announced that they were holding their policy rate steady in a range between 4.25-4.50%. While on its own, this decision was fairly inconsequential, tension and scrutiny has been building on the Fed since the beginning of year. Here is a chart of the Federal Funds rate over the past 10 years:
Interest rates were quite low until 2022, when the Fed starting raising them to combat high inflation in the aftermath of the COVID-19 pandemic. After rates peaked at a range of 5.25-5.50%, they remained at that level for one year until the Fed began cutting rates in September of 2024. Since January, they have held rates steady, citing the fact that inflation is still higher than their 2% target.
Meanwhile, as the Federal Reserve has been on hold, President Trump has added intrigue to the situation by consistently demanding that the Fed lower rates. In response, Fed chair Jerome Powell has communicated the Fed’s history of remaining politically neutral and independent. He’s also suggested that Trump’s tariff policy may potentially stoke inflation and remains one factor as to why rates have remained high. In response, Trump has threatened to fire Powell (something that most commentators believe is illegal) or nominate a successor Fed chairman as soon as possible (Powell’s term ends in May 2026) in an attempt to fight back.
Additionally, two Federal Reserve governors, Christopher Waller and Michelle Bowman, dissented on the decision to hold rates steady, instead voting to lower rates now. Perhaps they are angling to be the next Fed chair, or maybe they simply feel that lowering rates now is the right policy move. Regardless, the next Fed meeting is on September 17th, and Powell has given no indication that rates may go down at that meeting.
How Does This Affect Your Portfolio?
While all of this may be entertaining theatre, it also impacts financial markets and the economy. Lower rates affect mortgages and bond yields, making it more attractive to borrow money and less attractive to lend. Interest rates can also affect currency values and global trade. For example, the dollar has strengthened recently versus many foreign currencies as markets react to the reality of higher rates for at least another six weeks. They can also affect the stock market – in fact, markets declined in response to the Fed’s most recent interest rate announcement. While most of these fluctuations are short-term in nature, they reinforce the notion that markets are always adjusting and responding to what is happening now, while also forming new expectations about what is coming next.
Longer-term, over the next year or so, we expect interest rates to fall, despite what happened this week.
If you have any questions about how interest rate movements may affect your investments, let us know.
