Today the Fed delivered what the market expected – ushering in the start of a new easing cycle with a bang. 50 basis points. It was the kind of bang we saw in 2001, 2007 and 2020. Earlier this week, market’s were pricing in the possibility of a 50 bps as high as 70%. They were right. But despite this, the market closed lower. My guess is the market is not aligned with the so-called “dot plot”…
Don’t Bet on 50 Bps for Sept.
Do we have a ‘good, solid’ economy or one that’s at risk of a recession? Is the employment market robust or one that’s slowing sharply? Should the Fed cut 50 basis points or 25? And if 50… why? These are not easy questions to answer – as you can make the case either way (pending your lens). Regardless, the popular narrative is one favoring a soft-landing. Jay Powell echoed this sentiment with a victory lap at Jackson Hole. Former Fed Chair Janet Yellen supported this thesis over the weekend…
Thoughts on the Rest of the Year
Over the past year or so – one of the key investment themes has been “bad news is good news”. Bad news implied the Fed was more likely to cut rates. For example, after the market incorrectly assumed we would see 6 or 7 rate cuts at the start of the year – the Fed have finally come to the table. In other words, the economic risks (to growth) are sufficient enough for the Fed to act. This is important. What happens during this transition is “bad news is no longer good news”. History shows us when economic conditions worsen during an easing cycle – stocks perform poorly. Therefore, the market’s primary concern now is whether the Fed has waited too long?
Powell Takes a Victory Lap
Fed Chair Powell didn’t disappoint at Jackson Hole – giving the market what it wanted to hear… rate cuts are coming. All that remains how many and by when? That’s not something Powell was ever going to offer (why remove optionality) – but the market is willing to bet we receive at least three cuts by year’s end. All eyes now turn to two major economic reports: (i) PCE due Aug 6 and (ii) Aug nonfarm payrolls due Sep 6. For e.g., if Augusts payrolls are similar to June’s (where only 114K jobs were added) – we could see the Fed cut rates 50 bps come Sept. What signal will that send to the market?
For a full list of posts from 2017…