What the Fed’s Outlook Means for Business Owners

Transcript

Hi. I'm Matt Staninger, market research analyst at Oak Street Funding. Since the most recent Federal Reserve meeting and recent Supreme Court filings, there are a few important takeaways business owners should be paying attention to. Interest rates, inflation, borrowing costs, and the overall economic outlook can all play a role in how you plan for growth, acquisitions, expansion, or succession. Today, we're going to break down the key developments and what they mean for business owners in the months ahead.

With recent inflation and strong jobs reports, a rate cut this year seems unlikely. What does this say about the Fed’s view of the economy, and what should business owners take from it?

The economy has continued its resiliency. Since the start of the war, inflation has sharply increased. That has changed the Fed's path to the goal of two percent inflation. The most recent summary of economic projections shows a significant increase in forecasted inflation at the end of twenty twenty six with a median projection of three point six percent.
 
On the other hand, the labor market seems to be more stabilized and it showed a few months of strengthening.
 
Although the most recent jobs report was softer than expected, the overall picture shows more strength than projected. Unemployment even fell to four point two percent, which is another sign of a strong labor market.
 
Because both inflation and the labor market are running better than expected, this shifts the Fed's belief into policy not having a reason to loosen. In fact, there's still a chance we could see some tightening. The median federal fund rate is at three point eight percent on the SEP. That is just over the threshold for one rate hike this year, but just barely. It was a perfect nine to nine split among Fed members when projecting if there will be any hikes versus if the rates would stay the same or are cut by the end of the year.
 
The market currently skews much more heavily in favor to one rate hike as the most likely scenario.

Fed members are split with half expecting a rate hike and half expecting rates to stay the same or fall for the remainder of this year. How should businesses interpret this when planning for borrowing or growth? 

The most likely scenario shows very little movement in rates over the next eighteen months. However, the most likely scenario does not mean that this is more likely to happen than not. It instead means that out of the many many potential outcomes, that is the one that has the highest chance. There are numerous factors that could change the actual rate environment that could not have been predicted in the forecast. Areas such as international conflict, artificial intelligence, the labor market, and changes within the Fed under Kevin Warsh could all have an impact on what actually happens versus what's the expected most likely scenario.

The markets lean toward a rate hike this year, while many economists expect rates to hold steady. Why the difference, and which signals should business owners trust more?

From a general standpoint, the market tends to look at more current data as its lead source. So it heavily weighs on things like current inflation, current GDP growth, current unemployment, and current non farm payroll jobs created.
 
The market currently sees inflation pushing four percent, multiple recent months of stronger than expected employment data, and continued resiliency in spending.
 
Those all signal the likelihood of tightening.
 
On the other hand, economists typically look at forward expectations much more heavily. The current inflation is showing a heavy cause from the US Iran conflict. That's driven supply limitations in certain areas and those areas have seen prices soar quickly.
 
The common thought then translates to inflation being more of a temporary supply shock versus an overdrive of consumer demand.
 
The demand would be from an economist general view, what would more likely call for tightening. However, this is supply, so the general economist view is a rate change would not change those supply issues.
 
Neither view is necessarily right or wrong, but these are two entirely different ways of looking at the data. 

Newly installed Federal Chairman Kevin Warsh announced the creation of task forces focused on communication, balance sheet policy, inflation, data, and labor trends. Why do these matter, and how could they affect future decisions?  

Kevin Warsh is looking for immediate impacts. The task forces are meant to modernize the Fed and really deep dive into how they currently do business. He wants the Fed to discover, is there a better way than what they are currently doing? There may be some incremental changes both behind the scenes that the public may not see as well as some more public facing changes.
 
For instance, the data task force may find some different sources that are going to be more impactful for the Fed to use when making decisions. We may not see that change on how they use the data, but that impact could have implications on how members carry out their decisions. On the other hand, we could see communication shift drastically right in front of the public's eyes. Warsh indicated he had a press conference at his first FOMC meeting as chairman because he had something to talk about.
 
The communication committee may see other ways of communication as more impactful than holding a press conference and a q and a session after every meeting. The overall idea of the task forces is to ensure the Fed is operating as it should be in the twenty twenties.

Recent Supreme Court rulings may clarify regulations around the Fed and other agencies. What should business owners know about these, especially regarding Fed independence and future policy? 

Kevin Warsh has made it very clear that he intends for the Fed to remain independent of political affiliation.
 
Overall, the Supreme Court seems to stand by that. In a recent five four ruling, it was determined the president could not fire a Fed member for any general reason. Lisa Cook was at the forefront of this case because Trump was attempting to fire her. For business owners, this helps provide a higher confidence that a president cannot completely impact the balance of the Fed by removing someone. The Fed Board of Governors, those who have right to vote on policy, are appointed by the president whenever there's a new incumbent. This recent supreme court ruling helps protect the Fed from being interfered with and consequently skewed toward the in office presidential party.

How would a potential change from mandatory quarterly reporting to semiannual reporting affect business owners overall, and what specific implications could it have for RIAs and CPAs?  

This is another potentially impactful legal case. There's a proposed pending SEC rule amendment that would no longer require companies to report quarterly, but instead semi annually or every six months.
 
This would give public companies the option to forego reporting every quarter, reducing the frequency of transparency in actual financials.
 
That can create larger lags in seeing many key aspects of a company's health and it could create larger investor volatility when results are reported and forecasts are shared. For RIAs, this could make certain market investment strategies tougher to track in the short term. That could potentially slow proactivity to making changes compared to strategies that may be implemented today. It could also give an opportunity for technology to weigh more heavily on interpretations.
 
For CPAs, this may make certain reporting deadlines less frequent causing a drop in auditor reviews and interim reports. This may also increase the need for more advisory services within CPA firms as there would be a longer window for material event disclosures and the timeline for forecasting would increase.
 
As you continue to navigate a shifting economic environment, staying informed can help you make more confident and strategic decisions for the future. If you're considering growth, acquisition, succession, or other financing needs, Oak Street Funding is here to help you understand your options and plan for what's next. Thanks for watching.