We have indicated previously, that the evidenced-based justification for anything but a “one and done” 25-bp Fed rate cut in July — as an offset to policy hubris in December — was thin. Still, the market seems to be pricing in more. If we are to believe the June Fed minutes, a 50-bp rate cut would require the median voter to now embrace this aggressive move, when only one (James Bullard) was arguing for it in June. Even after the G-20 truce in Japan.
However, the Fed seems keen to acknowledge and incorporate global economic weakness more directly into its thinking. In Powell’s testimony last week, he emphasized throughout that the cooling global economy could bleed through to U.S. activity. While the US has never “caught a cold” when the rest of the world “sneezed”, tumbling gauges of manufacturing activity in the U.S. and globally certainly don’t seem to inspire confidence. Many believe and we concur that embarking on a new cycle of easing in the US would have ancillary benefits to emerging economies – a weakening dollar has the potential to lessen the risk of capital flight and allow their central bankers to ease further as well.
Bloomberg’s Matthew Boesler provides additional rational: according to the Fed’s own dot plot estimates, more than a 25-basis point rate cut is needed to turn Fed policy from restrictive to accommodative as indicated below.
Finally, Nomura strategists Jordan Rochester and David Wagner chime in with a study that considers over 200 data series. They conclude that “slower growth has started to feed through leading to a decline in the labor and product slack measures….This means lower inflation expectations that warrant new dovish central bank action.” They conclude by predicting around 75 basis points of monetary easing is called for under these circumstances.
Whatever the path from here, we’ve been saying for a while that normalization of monetary policy would prove challenging. In fact, it appears to be getting more and more difficult to navigate these waters as markets seek to impose policy – forcing the Fed’s hand and potentially calling into question the Fed’s ultimate credibility.
The views presented herein are those of Validus Growth Investors, LLC (“Validus”) and are provided for informational purposes only. The information is current as of July 2019 and is based on the economic and market conditions as of this date. The information is not intended as a discussion of the merits of a particular offering and should not assume that any discussion or information provided herein serves as the receipt of, or as a substitute for personalized investment advice from Validus Growth Investors, LLC or any other investment professional.
This material is provided for informational purposes only and does not constitute a solicitation. The material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any forecasts made will come to pass.
There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin.