We will be making updates to our website from 8:00 p.m. CST to 11:00 p.m. CST on 01/23. During this time, the website may experience some interruptions of functionality or be unavailable.

Due to inclement weather, our San Antonio Quarry Heights Financial Center is closed Tuesday, January 21, 2025, and our Northwest Houston Financial Center is open by appointment only. All other locations remain open with normal hours of operation.

No change — Fed Meeting of January 29, 2025

""

Jobs are the trigger; not inflation 

Fed Meeting

January 29, 2025

  • No change in rates: Fed Funds range is 4.25% to 4.5%. 
  • Removed language about progress on inflation.
  • Added labor market conditions “remain solid.”
  • Powell “do not need to be in a hurry” to lower rates.

Hawkish 

Wall Street likes labels. When a Federal Reserve press release or Committee member describes the economy as “strong” or “solid,” the statement is considered “hawkish.” Hawks want higher rates to slow down excesses in the economy. Doves or “dovish” statements may indicate a desire for lower interest rates or looser monetary conditions. So, Wall Street tries to put you in one camp or the other: Do you want a strong economy with slightly higher rates or a weak economy with a lower cost of funds. At least that is the spin put out by the financial media.  

At today’s FOMC meeting, the Committee voted unanimously to leave the Fed Funds range unchanged. Note that at the beginning of each year, four regional bank presidents rotate as voters. Based on their speeches, the new group of voters appears to lean dovish. The press release continues to state that the Committee “monitor the implications of incoming information.” In other words, they base their decisions on recent economic numbers. The recent economic data show employment and job openings are holding steady, jobless claims are very low and consumer spending is relatively strong. Those and other data points must have swayed the voters to stand pat on rate cuts.

The key to today’s “hawkish” press release is the deletion of the inflation phrase, “has made progress toward the Committee’s 2 percent objective….” The remaining phrase is: “Inflation remains somewhat elevated.” Traders interpreted this phrase as the Committee believing inflation may rise in the future. That would necessitate higher short-term rates in their view. Traders pushed bond prices lower by a small amount. Stocks dropped as much as 0.8% before rallying back to mild losses.

We have steadfastly maintained that the Fed did not win the inflation battle. They gave up last summer to publicly focus on unemployment. Inflation bottomed last year, and several components are beginning to rise. The shelter component, what we know as housing and rents, is updated every six months. Anecdotal evidence suggests that over the next year, the rent component will drift lower thanks to apartment construction. History suggests that inflation comes in waves about three to four years apart. The last peak was in June 2022. This squares with our read that inflation should end this year north of 3%.

Four, not three

We asked after the December rate cut: “Is the third time the charm to end this cycle?” We think no more rate cuts has about a 25% probability this year. Our base case is one more cut in the second half of the year. Behind closed doors, the Fed would like to have three or four more rate cuts. Its focus is not inflation — doubtful it ever was — but global liquidity and debt costs. Lowering our interest rates closer to the rest of the world would lower the value of the dollar relative to foreign currencies. This makes trade easier.

The prior administration shifted a meaningful portion of the federal debt into short-term Treasury Bills. Lower short-term rates would help the debt costs of the federal budget. Our current interest bill for the federal debt is now above $1 trillion. Supplying more dollars to the financial system also helps lower the value of the dollar. The Fed continues to buy bonds in the open market and at auction. As a large buyer of Treasury bonds, the Fed puts a floor under bond prices. Since prices move inversely to rates, this suppresses interest rates. Buying on the open market distributes dollars into the banking system. Because the Fed is buying less per month than it used to, it calls this buying program “quantitative tightening.” When it was buying a lot of bonds each month, for example the 2009 housing crisis, it was called quantitative easing or QE.

Summary

The Fed would like to lower interest rates but does not have a meaningful narrative to justify cuts. The new administration would also like lower rates to help the interest cost in the budget. We would like lower rates so we could afford to move and buy a car. The Fed generally only lowers rates when the economy meaningfully slows and unemployment spikes higher.

Steady employment reports and very low unemployment, along with steady consumer spending, mean the economy is doing fine for now. There are plenty of headwinds that could slightly slow the economy later in the year. A recession is not in the data, so lower rates are not in the cards.

Please let us know how we can help you. 


Steve Orr is the Managing Director and Chief Investment Officer for Texas Capital Private Bank. Steve has earned the right to use the Chartered Financial Analyst and Chartered Market Technician designations. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on Twitter here.  


The contents of this article are subject to the terms and conditions available here.

Texas Capital Private Bank™ refers to the wealth management services offered by the bank and non-bank entities comprising the Texas Capital brand, including Texas Capital Bank Private Wealth Advisors (PWA). Nothing herein is intended to constitute an offer to sell or buy, or a solicitation of an offer to sell or buy securities.

Investing is subject to a high degree of investment risk, including the possible loss of the entire amount of an investment. You should carefully read and review all information provided by PWA, including PWA’s Form ADV, Part 2A brochure and all supplements thereto, before making an investment.

Neither PWA, the Bank nor any of their respective employees provides tax or legal advice. Nothing contained on this website (including any attachments) is intended as tax or legal advice for any recipient, nor should it be relied on as such. Taxpayers should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor or legal counsel. The wealth strategy team at PWA can work with your attorney to facilitate the desired structure of your estate plan. The information contained on this website is not a complete summary or statement of all available data necessary for making an investment decision, and does not constitute a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the authors and not necessarily those of PWA or the Bank.

©2024 Texas Capital Bank Wealth Management Services, Inc., a wholly owned subsidiary of Texas Capital Bank. All rights reserved.

Texas Capital Bank Private Wealth Advisors and the Texas Capital Bank Private Wealth Advisors logo are trademarks of Texas Capital Bancshares, Inc., and Texas Capital Bank.

www.texascapitalbank.com      NASDAQ®: TCBI