Fed Cuts, Markets React

In this episode of the Cents of Security Podcast, host Mary MacNamara and Interactive Brokers Senior Economist Jose Torres unpack the Federal Reserve’s September rate cut, its implications for labor markets, inflation, and investor sentiment. They also explore geopolitical developments, tariff dynamics, and the outlook for future monetary policy decisions.

Summary – Cents of Security Podcasts Ep. 115

Mary MacNamara

Hello everybody. Welcome to the Cents of Security Podcast. I’m Mary MacNamara and I’m joined here today with Senior Economist Jose Torres with Interactive Brokers. Hi Jose, how are you?

Jose Torres

Hi, Mary. Great to see you. Great to be here again here on our new Weekly Cents of Securities podcast coverage. It’s gonna be great.

Mary MacNamara

Yes, indeed. Okay, so what we’re going to talk about today is yesterday’s fed rate cut and everything about it. So just. Fill us in. What’s going on?

Jose Torres

Yeah, so we got a 25-basis point reduction. There was one dissenter newly appointed governor, Stephen Miran, which by the way, we had a podcast here at Interactive Brokers with him last year, before he was appointed by the Trump Administration as Chief Economist. We invite you all to go into the podcast archives and go check out that podcast with Stephen Miran.

Also joining us was Nouriel Roubini also known as Dr. Doom, and of course, Chief Strategist Steve Sosnick. That fellows Stephen Miran, a new governor, he was in more in favor of a 50-basis point reduction. President Trump wants a lot lower interest rates. There’s theories roaming around that President Trump installed, Chair Miran, who was formerly Chair of the council of Economic Advisors now at the Federal Reserve.

He took unpaid leave from the Council of Economic Advisors to serve as the Fed in the Fed rather. He was the only dissenter. He preferred a 50-basis point cut. But what was. Odd is that Governors Waller and Bowman in July, they dissented in favor of a 25-basis point reduction. I thought that they were going to dissent this time as well because I thought if they wanted to cut in July and they want to cut now, then why not do a 50 to catch up from the July meeting, which didn’t feature a cut.

So, it showed a lot of. Unity at the Fed, considering that all 11 voting members were fine cutting by 25-basis points. Chair Powell mentioned labor market risks, but there’s concerns with the unusual nature of what’s going on now with employment conditions, you have less supply of labor, so less available workers because of the immigration restrictiveness.

And then you also have. Weaker demand for labor, but it’s really unclear at this juncture, whether it’s less labor supply or less labor demand that’s really moving the needle significantly. That was part of the decision of course to enact a risk management reduction of 25-basis points, just in case the labor market is weakening a lot faster than expected beneath the surface.

The Fed has dual mandates of maintaining stable prices. Which over the long run, the objective is 2% inflation and low unemployment, right? The idea is protect the currency, keep price increases, subdued while also keeping the population working at a high level low unemployment so that the economy can be productive and continue growing and that living standards can improve over time.

Markets are loving it. Stocks are at new all time highs, particularly the rate sensitive areas that are more sensitive to monetary policy accommodation. Russell 2000 for example, up two and a half percent today, really leading the pack. And stock investors are really happy that the fed cut rates in September, but also pointed to one or two remaining cuts.

By the end of this year, in their summary of economic projections, which they released quarterly at their June, September, January and December and March meetings and they essentially pointed to one or two more cuts this year. But what’s upsetting Treasury market participants is that the Fed only pointed to one cut, just one in 2026, and just one additional one in 2027.

Going into this meeting, the market was expecting six rate cuts by the end of 2026, 3 this year, which included yesterdays on September 17th, as well as three in 2027.

Mary MacNamara

Oh. So, less eggs in the Easter basket here.

Jose Torres: Down the line, yes. But right now, from now to Christmas, things are looking pretty good. Also, in the projections include estimates of unemployment, growth and inflation. Growth got revised upward. Growth has been doing a lot better recently. Especially in the second half of this year, we’ve seen consumer spending really rebound.

Also, this week we got a really strong retail sales report. It was the third consecutive month of strength coming off of the first half of the year, Mary, where things were very turbulent. No one really knew what was going to happen. Tariffs were very elevated. The perception rather that tariffs were going to be very elevated.

Drove that April sell off in. Stocks and treasuries, interest rates, shot up stocks, went to the basement. President Trump came out with a board with numbers next to each country, very high numbers, 40%, 30%, 50%, et cetera. In reality, the average tariff rate is only 15%, so it’s not, in my opinion, enough to make a real meaningful impact on inflation or on growth in the long run.

Mary MacNamara

What about this? Isn’t there some sort of legal thing coming up about these tariffs and whether or not there official or legal? And some may be rescinded, and we may have to pay off, pay back. There’s, you hear that in the news too. And then the other question I wanted to ask about is that President Trump was in the UK yesterday, right?

It seemed like very upbeat. There were going to be some deals with the UK, what do you know about that? Anything? I’m sure you do.

Jose Torres

Yeah, no, we were really busy covering the Fed decision, but there. Seems to be an ambiance that the UK and the US is getting closer. There’s a lot of talks about what’s happening with geopolitics. President Trump thought he was gonna get his way with President Putin of Moscow very quickly, and it looks like that’s really looking like a more longer run kind of battle.

We also got news from India this week that India’s been caught in between the superpowers. Really geographically, they’re closer to Russia and China. They’ve been rush buying Russian crude oil for a long time. That makes President Trump angry because he doesn’t want the Indians to be essentially subsidizing the Russian War machine.

But the Indians argue that they need to buy energy, and it’s better for them if they can buy at a lower cost. So, these are some of the topics that are occurring on the geopolitical stage. Of course, the UK has a really, a sweet trade deal with the US only has tariffs of 10%, whereas with the EU, tariffs are higher.

As well as they’re with the uk, the tariffs are below average. The UK is essentially on the President’s more positive list or perception, and then also the royalty President Trump likes it when Prime Minister Starmer comes in and gives him a letter from the King.

And he was with the King yesterday and it seems like things in the UK are going well between UK and US relations the UK. However, bank of England did not cut. Their inflation is up at 3.8% even though their job market is weakening significantly. Inflationary pressures are too strong in England right now for their central bank, the BOE, to continue cutting.

So, they, they remain steady this morning September 18.

Mary MacNamara

So just to wrap up a few questions. Let’s bring it back and ground this conversation with some facts about this whole Fed thing. First of all, the, how often do the Fed Governors meet

Jose Torres

Eight times a year.

Mary MacNamara

Eight times a year? How many governors are there? If they do want to announce two more rate cuts, can they just spring it on at any time? Or does it have to be an official meeting, and everybody votes? Or how are they going to do that if there’s only one meeting left? Maybe two more rate cuts. Do they double, like a double scoop of ice cream? We’re going to give you two rate cuts for one. Like, how does that work? Or they just announce it, or do they have to vote on it?

Jose Torres

So that’s old school emergency meetings. If there was something crazy happening in the economy, they’d hold an emergency meeting and cut rates right there. But these days we’re not really in right now at this juncture. Economic conditions are quite buoyant. Unless there’s a accident in financial markets or something, or in the economy, not really expecting emergency meetings.

We do have an October and the December remaining. We’ve had six this year. So, we have two. Yeah, so we have two. As far as what markets are expecting, they’re expecting either. One or two more cuts, that’s what the Fed was expecting. Going into yesterday’s meeting, folks were expecting three essentially two after yesterdays.

Now it’s, between one and two. That was a long question. What else did I talk? Oh, governors. Governors. There are seven governors. They vote at every meeting. All eight meetings.

Mary MacNamara

And they’re there for how long? They’re 12 years.

Jose Torres

14 years.

There but there’s 12 voting members because there’s five regional bank presidents that are voting.

One is always the New York Fed President voting, and then the other four, they rotate every year.

Mary MacNamara

And so, we got to keep our eyes peeled and we’ll keep listening for, all the economists out there, especially YOU, to see if you hear any news. And once again, Jose Torres, thank you so much for joining us and we’ll be doing these weekly folks. It’s all about economics and trying to understand the various reports that are coming out or just market action. Seems very topical at the moment.

Jose Torres

Next time we got to talk a little more about Forecast contracts. September 17th. On Fed Day, we had year to date record. North of 1.1 million forecast

Mary MacNamara

Wow.

Jose Torres

Being traded yesterday on Fed Day. It was it was driven by Fed funds, contracts. People were going nuts trading before the report.

So, it was really buoyant, a lot of activity. We invite all of you to come into our forecast Trader markets. It’s simple, powerful lots of choices as to what you want to invest in. Really five major types of participants. We have investors, we have hedgers, we have speculators, we have arbitrages, and we have market makers as well as folks from all walks of life.

We’ll be integrating forecast contracts also in the Cents of Security pod weekly podcast.

Mary MacNamara

All right, Jose, thank you. And I know you’re busy we appreciate your time.

Jose Torres

Looking forward to next time.

Mary MacNamara

Yes. Thank you. Thanks folks.