July 17, 2025
By Peter Bower
The Bull cautioned, almost from the outset of the Federal Reserve’s fight against inflation, that it was likely to remain sticky. The two percent target would prove to be too ambitious, and the long-term experience was closer to three percent. Getting to a lower sustainable rate would require damaging economic growth, if not pushing our economy into a recession. This is exactly what has been playing out.
The stock market is not bothered by the current inflation rate. It is more fearful of the Fed over-emphasizing the issue and damaging economic growth prospects. After all, 2.5% to 3% inflation is manageable. A little inflation is healthy for asset prices; it keeps collateral for loans intact and is an incentive to become ever more efficient to offset its effects. Inflation only becomes a problem when it rises uncontrollably, overwhelming efforts to mitigate it.
Should interest rates be lower? Probably! Three and one-half percent on the Federal Funds rate would still give a margin of restraint over the current inflation. Lower rates would help with housing, autos, and other big-ticket items that many consumers would need to finance. A higher economic growth rate here would help offset Federal deficits. With that, will the Fed lower rates at its meeting next week? Probably not. Resisting pressure from the president and saving face will probably have them wait until September. Oh well, the markets can handle it. Stay steady, my friends.
-The Lonely Bull
