Market Update 2/12/25

The new year is off to a hectic start and news flow about tariffs, border control, DOGE and international policy is nearly constant. These headlines gyrate markets and confuse many investors and our job is to help make sense of it all. But we monitor facts and some of those come in the form of interest rates, inflation data, and monetary policy.

CPI is running hotter than the Fed would like at 3%, which makes the likelihood of interest rate cuts minimal. However, the Fed’s potent tool to influence the economy is its balance sheet. While interest rate policy attracts headlines, it’s their balance sheet that dictates the money supply in the economy and over the last three years, it has been decreasing.

We pay particular attention to the balance sheet and tight money supply will reduce the price of assets as there are simply fewer dollars in existence to support prices. If the balance sheet continues its decline, the economy will slow, and inflation will subside. So, don’t put all the creed in the Fed Funds rate alone. There is action behind the scenes in the form of money supply and it matters.