Interest Rates Continue to Drive I Fund Investment

Welcome to October!  September wrapped up with a mix of policy drama and economic signals that kept markets uneasy but positive. I'm going to be digging into key events from the past month—focusing on macro drivers like Federal Reserve moves, the almost-certain government shutdown, and the surprising rebound in consumer spending amid cooling inflation.

• Federal Reserve.  The Fed met on September 16-17, and as expected, they delivered a quarter-point rate cut, bringing the federal funds rate to 4.0 - 4.25%. This was their third cut of the year, signaling continued confidence that inflation is trending toward the 2% target (the real target has been debated). Powell's press conference emphasized a "data-dependent" approach, noting that core inflation dipped to 2.6% year-over-year in August data that was released just before the meeting. Employment numbers are still solid (they are committed to maximum employment), but they are still cautious due to moderate growth and slightly higher than desired inflation.  However, international interest rates are still lower than the Fed (e.g. ECB is 2.5%). I think at least 2 more rate cuts are expected in the next 4-6 months and this will weigh on the economy.  If people are looking to buy a house or a car and can wait just a bit longer for a 0.5% or even a 0.75% discount, I think they will. This could slow growth in certain industries.  
• Government Shutdown.  As of this writing, the shutdown looks inevitable.  As everyone that reads TSP Coach is either a military or civilian employee, we are all affected.  We have had so many government shutdowns in the last 15 years, it’s hard to count them all. There is a persistent rumor that departments (little d) and agencies (little a) that are shutdown might not open again.  I have also seen rumors of a massive resignation.  Both potential events would be disruptive to certain economic sectors and are hard to plan for.  However, with our national debt at unsustainable levels, government spending needs to be reigned in.  We are seeing great returns in the stock markets, but gold is also on a tear for a very good reason.
• Value Stocks.  When I was in business school 20 years ago, Value Stocks were all the rage-consistent, steady performers.   A stock that would return 8% year over year was an absolute rock star.  Now 20 years later after many downs and a few ups, they seem to be back in vogue, along with dividend stocks.   I’m not convinced they are truly ready for prime time again with the incredible returns we are seeing, but a move to value stocks would favor the S Fund more and it would also shift my allocation out of the I Fund.  However, the Federal Interest Rate must drop more before the I Fund stops looking attractive.

Best of luck to everyone in the government shutdown.  I know it doesn’t really mean a day or days off as all the work still must be done sometime.  I’m still staying in the C Fund and the I Fund and will be looking to maximize my contributions right up the limit.  Now is the best time to see where you are and add (or subtract) just enough to meet the annual limit.  Keep investing!

TSP Coach