Around 9:00 am CDT this past Friday, I watched Federal Reserve Chairman Jay Powell deliver a speech about the economy and monetary policy. He was perfectly starched in a suit and tie, and you wouldn’t have known if he missed a single word on the teleprompter. Let’s just say, it was pretty dry stuff.
Regardless, the U.S. stock markets apparently loved it, as stocks soared throughout the day on expectations that the Fed will begin cutting the overnight lending target rate sooner rather than later.
You aren’t alone if this feels like déjà vu all over again. After all, it seems like we have been waiting for the Fed to “cut rates” for an extremely long time, doesn’t it? Am I alone in feeling this way? I am not, am I?
So why has it taken so long to get to this point? The Fed last cut the overnight rate back in December 2024, and then nothing. Since that time, the economic data has been arguably unreliable due to the noise around tariffs. Reports that seemed discouraging, like the 1st Quarter 2025 GDP report, actually weren’t. By contrast, economic data that appeared robust really wasn’t. The 2nd Quarter GDP release being a perfect example.
Where the rubber meets the road, I submit the U.S. economy is currently the equivalent of, say, a plain banana. They’re both just okay. I don’t get too excited about the things one way or the other. They are, quite literally and figuratively, neither fish nor fowl.
But will a rate cut or two make the economy that much more exciting? Will it grow that much more rapidly? Will we be able to do whatever our hearts desire? Is Santa Claus going to come to the upcoming Federal Open Market Committee (FOMC) in September, and shower the financial system with cheaper money?
I have been doing this for a long period of time, and my honest answer is: probably not. How is that for mostly non-committal?
You see, a 25 basis point (0.25%) reduction in the overnight rate is better than nothing, but it isn’t a silver bullet.
For instance, 0.25% of $10,000 is $25. That is about a nickel short of 2 #1 value meals at the Chick-fil-A on 1648 Montclair Road (35213) here in Birmingham, which totals $11.39 plus tax (10% sales tax). For grins, the math is: $11.39 X 2 = $22.78 X 1.10 = $25.058.
Bummer.
- If that is all it is, why is it so important?
- Why have we been wringing our hands and gnashing our teeth about the Federal Reserve?
- Why has the President been blasting the Fed Chairman about it?
- Why have investors been on pins and needles?
- Why has it been the topic of conversation for such a long time?
For what, a couple of chicken sandwiches, some waffle fries and two sodas?
Well, the sheer size of our economy turns an individual $25 savings into a massive amount of money. Further, one rate cut often leads to more, and that is when the math starts to get really fun, especially for stocks.
Assume, Company X has 10 million common shares outstanding, $50 million in debt at 8% floating, net earnings of $25 million and has a Price/Earnings ratio (P/E) of 20. As such, its stock trades at $50/share, and the company has a market capitalization of $500 million.
Fun with numbers, huh? Stay with me.
Let’s Put 0.25% into Perspective
Now, a 0.25% reduction in its interest rate could mean a savings of $125K which it could hopefully drop to the bottom line pretty easily. If so, the company would have $25.125 million in earnings. If the P/E stays constant at 20, the stock price should increase to $50.25.
Big deal, right? An extra $0.25 per share? Well, now multiply that by the 10 million shares. What do you get? That’s right, $502.5 million. As such, a measly little 0.25% rate cut, which can only get you a couple of value meals at the Chick-fil-A, is worth around $2.5 million in wealth at this one small company alone.
From Small Change to Big Money
Now, apply this little example across the entire country. While you are at it, do the same thing with your value meals. Once you have done that, do it again with another rate, yet another one and one more for good measure.
Okay, you aren’t going to do that, and I didn’t really expect you to do so. The numbers are likely in hundreds of billions of dollars, if not more.
Interesting how little changes in the price of money can lead to big changes in aggregate balance sheets and pocketbooks, isn’t it? That is why investors were so fired up this past Friday. After waiting, mostly patiently, since last December, folks saw some light at the end of the rate cut tunnel.
Of course, we will just have to wait until September 17, 2025, at 1:00 pm CDT to find out if the Fed actually did what everyone wants it to do. Then, at roughly 1:30 pm CDT, Fed Chairman Jay Powell will tell us what the Fed did, or didn’t do, and why. He will be perfectly starched in a suit and tie, and you won’t know it if he misses a single word on the teleprompter.
It will be pretty dry stuff, just like it always is. And you want to know what else? People will love it then, too.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
Chief Investment Officer
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.