For those of you who have read this column or watched our
It’s been over a year since the Federal Reserve (Fed) last raised short-term interest rates in July of 2023. The Fed has held rates steady and closely watched to see how the economy—inflation, specifically—would respond. Inflation proved more stubborn than anticipated, but most recent data show core inflation at its lowest since April of 2021, nearing the Fed’s 2% target.
But bringing inflation back to target is only half of the Fed’s dual mandate. It also must keep a close eye on the labor market. Employment has ticked up modestly, which helps keep inflation in balance. The number of open jobs for every unemployed worker has dropped from more than 2.0 at its peak to around 1.2 currently. The rate of workers quitting their jobs for another job has fallen and is back to pre-pandemic levels.
However, we anticipate some market volatility around different economic data releases if there are surprises to the upside or downside, or significant revisions, particularly around employment data. This is what we saw in early August following the July Jobs report. The unemployment rate, once it starts rising, can sometimes move higher very quickly. The Fed—and markets—will continue watching this closely.
Slowing inflation, a labor market that is loosening but still solid, and impending rate cuts could provide a backdrop for continued strength in the equity market. In such a favorable scenario, we could see the stock market broaden beyond the large technology stocks. Smaller companies are often more highly leveraged and could benefit from lower rates.
Credit spreads are very tight, meaning you don’t get paid much for taking a lot of credit risk in bonds. Investment-grade corporate bonds and municipal bonds could be a way to benefit from lower rates without taking outsized credit risk.
David Royal is executive vice president and chief financial & investment officer at Thrivent.
