Displaying items by tag: fed

(New York)

There is a lot riding on the results of the Fed’s meeting this week. Every big bank is weighing in and the consensus is that the markets have gotten too dovish in their projections and that the Fed won’t cut now, or as quickly as investors expect, all of which will lead to a decline in stocks. Both UBS and Goldman think that the pace of rate cuts forecasted by markets would only make sense in a recession, which seems unlikely. Morgan Stanley says stocks are very vulnerable to a decline if the Fed doesn’t cut as it will shift expectations and lead to tighter conditions. JP Morgan thinks equities will decline even if the Fed does cut.

FINSUM: We think the Fed will stay on hold for now but signal cuts in the Fall. We expect this will have a neutral to mildly negative effect on share prices.

(New York)

You may normally think of it in terms of stocks, but “buy low, sell high” applies to bonds just as much, and that is a good way to think of the market right now. With yields having fallen so far since last year, one strategist said it was time to accept the “the present the Fed has given us”, and swap out bonds for floating rate securities, which have lagged this rally. The scale of returns in the bond market is impressive. For instance, the iShares 20+ year Treasury Bond ETF has risen over 9% since the beginning of the year.

FINSUM: It seems unlikely to us that bond yields are going to drop much further, which means there is little reason to wait for further gains.

(New York)

Deutsche Bank is an uber dove. The bank has just come out saying it expects the Fed to make three full rate cuts before the end of the year. “Over the past month, downside risks to the outlook for the US economy and Fed have built”, said Deutsche Bank, continuing that a mix of different concerns, from the trade war to weak inflation, are pointing to “more negative outcomes”. Pimco thinks the Fed won’t cut this month, but that it may cut by 50 bp in July, saying “we wouldn’t expect Fed officials to wait for the economic data to confirm declining US growth — if they do, they could risk a more meaningful shock to economic activity”.

FINSUM: The odds of a downturn certainly seem higher than an upturn, which means the Fed is much more likely to cut than to hike. That said, three rate hikes in the next six months sounds a bit aggressive to us, especially because the Fed would want to leave some firepower if the economy really heads downward.

(New York)

Jay Powell, head of the Fed, has been working on a year-long project to overhaul one of the Fed’s most important goals. That goal is full employment. The Fed only has two mandates, stable prices in the economy, and maximum employment. Yet the definition of maximum employment is now up for debate. At the core of the consideration is the idea that having a job is different than having a good job. The difference between the two means the Fed may use a different calculation for measuring employment. That potential change has huge implications, as it would likely lead to looser monetary policy both in the immediate future and further out.

FINSUM: We think there is a big difference between the quality of different jobs in the economy which needs to be accounted for by the Fed. The current way of measuring employment was designed when most jobs were permanent and full-time, but with the rise of the gig economy, measuring methods need to shift to account for the changing nature of the labor market.

(Washington)

Investors have been unsure of how the Fed would handle the trade war. Recent minutes from the Fed showed no indication that the central bank was thinking of cutting rates even though the market expects it. However, the silence has finally been broken as Fed chairman Powell announced yesterday that the trade war is on the list of the Fed’s concerns and that the central bank would act to protect the economy from its fallout. In his own words, Powell said the Fed would “act as appropriate to sustain the expansion”.

FINSUM: We took this as a pretty strong affirmation that the Fed is watching the trade war situation closely and is ready to act. Markets liked it.