Investors Don't Want a Stronger Economy — They Want Rate Cuts

(Yahoo! Finance) - Bad news can be good news, at least when the Fed and interest rates are concerned.

For every crack revealed in an otherwise solid labor market, as new data showed Wednesday — and May's jobs report might show Friday — there's an impulse to cheer what it could mean for central bankers.

The worse the economy is doing, the more likely officials will reverse the tightening.

But what makes this cycle so unusual is that instead of easing rates to stem a rapidly weakening economy, the first cut will come as a response to falling inflation. Investors aren’t just expecting some of the news to be good, they want all of it to be.

“Looking ahead, there is a real possibility of a very encouraging combination of lower inflation, lower interest rates, and healthy economic conditions,” said David Alcaly, lead macroeconomic strategist at Lazard Asset Management. The soft landing at the end of the rainbow.

Rather than trying to dodge an imminent recession, the coming rate cuts could serve as the final key ingredient in a delicious recipe.

But many investors have already been feasting. The stock market is blazing through records. Savers and retirees are being rewarded under elevated interest rates as yields on money markets and government bonds have climbed, channeling healthy income to the slow and steady.

And ironically, the wage and wealth gains that many Americans have enjoyed recently may be delaying the Fed's move to cut rates.

But generally speaking, lower rates are better for people who earn their income from wages rather than from interest. And elevated rates have squeezed many parts of the economy.

It's not hard to see why consumer sentiment numbers aren't over the moon. Those looking for a mortgage will benefit from lower rates and a lower monthly payment. Delinquencies on credit card and car loans are still rising above pre-pandemic levels, hitting younger and lower-income households especially hard. Another area where rate cuts would bring some relief.

Stock market bulls don't see the portfolio party ending either. Lower interest rates will make borrowing cheaper and sweeten the prospects for business investments. They see the start of the Fed's easing as the next phase of the market rally.

But as Myles Udland noted in this newsletter last month, the beginning of rate cuts doesn't always lead to stock market glory. Rate cuts, after all, are usually to solve a problem.

That's a deal investors are willing to take. The idea of what lower rates could bring is intoxicating, given how things have been going with nosebleed rates.

With investors, mortgage-seekers, and anyone else who's sensitive to the high rates waiting hopefully on Jerome Powell and the Fed, the pressure to deliver a soft landing continues to mount.

But as almost every Fed official reminds us, as if reading from the script, it's "higher for longer" until further notice.

By Hamza Shaban - Senior Reporter

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