August 26, 2019
When Federal Reserve (Fed) Chair Jerome Powell speaks, markets listen. Friday, August 23, the markets had a new opportunity to gauge the Fed’s direction when Powell gave a closely watched speech at the annual gathering of central bankers in Jackson Hole, WY. This was Powell’s first opportunity to follow up on the release of the minutes from the Fed’s July 30-31 policy meeting, where the Fed cut its main policy rate for the first time since the 2007-2008 financial crisis. The minutes revealed general consensus among the meeting attendees that a cut was necessary, as well as a lively debate about the overall future path of rates.
Powell returned to standard talking points at his Jackson Hole speech. He said the economy “continued to perform well overall,” but he highlighted increasing risks from a deteriorating global economy and uncertainty around trade, the same risks that induced the Fed to cut rates in July. While he didn’t lay out a clear policy path, Powell pledged that the Fed would “act as appropriate to sustain the expansion,” potentially laying the groundwork for an additional rate cut when the Fed next meets September 17–18.
“We agree that U.S. economic fundamentals remain sound, even in the context of slowing growth,” said LPL Financial Chief Market Strategist John Lynch. “But the market is also sending strong signals that policy remains too tight given risks from trade and slower global growth.”
Low inflation expectations, an inverted yield curve, and U.S. dollar strength from elevated yields compared to other major developed economies all are adding to the argument that policy is too tight. We think further “insurance” cuts may be merited, but we would not view another rate cut as the Fed trying to get ahead of a recession. The Fed works best when it’s pragmatic, and further cuts would fit in well with its history of sensible course corrections.
Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure.
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