3rd Quarter. You may have thought this was a football-related column! No, I’m not “tackling” another sports theme.
The “third quarter” refers not to the third quarter of a game, but rather, it has to do with the third quarter of the calendar year, which will end next Wednesday. The “score” that I refer to is the U.S. economy, and how it fared in the third quarter of the year (July through September). (Stay until the column’s conclusion and get your sports fix!)
So, in today’s column, I will look at how various events of the third quarter of this year impacted the U.S. economy, businesses, and personal finances, and what it portends for the fourth quarter/end of the year.
- Event #1 – The Federal Reserve’s FOMC Meeting (September 15-16): The Fed’s Federal Open Market Committee (FOMC) is composed of 12 members (the 7 members of the Fed’s Board of Governors, the President of the Federal Reserve Bank of New York, and 4 of the other 11 Presidents of Federal Reserve Banks) and meets eight times a year. During those meetings, the FOMC reviews economic and financial conditions, assesses the risks to its long-run goals of price stability and maximum employment, and determines the appropriate stance of monetary policy (For more on monetary policy, see my September 3rd column). Ultimately, that “appropriate stance” is whether the FOMC decides to raise or lower interest rates or keep them the same. In this meeting, the FOMC determined that it was losing the battle with inflation and voted 12-0 to raise rates by 0.25% in an effort to maintain price stability.
- Impact: In the short-term, this is probably not the greatest news for businesses and investors. As interest rates go up, the cost of borrowing goes up, negatively impacting business and consumer debt. In addition, existing bond prices go down as yields go up. The good news is that the Fed demonstrated its independence by choosing monetary policy that was data-driven (an environment of increasing inflation combined with steady employment and growth points to tightening monetary policy) and not politics.
- 4th Quarter: The FOMC meets twice in the fourth quarter: in late October and early December. It is likely they will raise rates at least another 0.25% in at least one of these meetings. While this may cause short-term pain to businesses and individuals in the form of higher cost of borrowing, it is good news longer-term on a couple of fronts. First, these increases in rates should help tame inflation and bring it closer to the 2% Fed target, ultimately helping both businesses and the consumer. Second, it demonstrates that the Fed under Kevin Warsh will not be influenced by politics. While President Trump has been surprisingly quiet on this front lately, Vice President Vance took his place by erroneously promoting lower rates in early September. Fortunately, Warsh and the rest of the FOMC ignored him.
- Event #2 – The Ongoing Iran Conflict (Entire Quarter): The conflict that began in February shows no sign of a near-term resolution. While armed interaction has been limited, there have been intermittent skirmishes in and around the Strait of Hormuz. While the Iranians have attacked oil and liquid petroleum gas tankers in the Strait, the U.S. continues to blockade and target oil tankers linked to Iran’s Islamic Revolutionary Guard Corps. In addition, the U.S. continues to ramp up economic sanctions that have created significant shortages in Iran. On Tuesday, in a speech to the United Nations, President Trump indicated that he needed to decide between making a deal with Iran or “drive Iran into hell with no chance of survival…”
- Impact: Clearly, the most significant impact has been the increasing price of oil, which has translated into gas prices of over $4/gallon and diesel prices approaching $7/gallon. This has had a significant impact on inflation and the budgets of individual consumers and, in particular, businesses who, in many cases, pass on the cost to consumers.
- 4th Quarter: I do not expect President Trump to take any significant military action against Iran until after the mid-term elections. The economic sanctions seem to be working, and if so, Iran will have to come to the bargaining table that will ultimately cut a deal that will open the Strait. At that point, we can start seeing decreasing oil prices, which will also help with inflation.
- Event #3 – Trade War with Canada (August – September): In mid-late August, the U.S. and Canada both indicated they were close to a trade deal that would avert significant tariffs. In fact, on August 18, President Trump claimed the two countries had a deal. Unfortunately, it has been reported that Commerce Secretary Howard Lutnick got involved, changing the parameters of the deal such that Canada suspended the negotiations a few days later. This led to President Trump imposing 50% tariffs on Canada, causing Canadian Prime Minister Mark Carney to impose retaliatory tariffs on the U.S.
- Impact: A lose-lose situation for both countries. It is early, but it is clear that these tariffs will decrease trade among the two countries and increase the prices of items that do cross the border.
- 4th Quarter: The implications will be greatest for the states nearest the Canadian border as trade and cooperation will continue to decrease, and price increases will not help our ongoing inflation problem. Logic would dictate both countries coming back to the negotiating table.
These three events, the FOMC meeting, the Iran conflict, and the Trade War with Canada, are clearly impacting the economy of the U.S. and the finances of businesses and individuals. However, there is reason for positivity as we look forward to the 4th quarter and beyond.
Fortunately, no matter what happens economically, locals can be pleasantly distracted by some of our favorite teams. In the 3rd Quarter, the Braves clinched the National League Eastern Division title and head to the postseason, while the UGA Bulldogs are off to a 3-0 start (as are my Fighting Irish!).
The above paragraph illustrates how sports can impact the economy no matter what quarter we are in!
