What the Fed’s Latest Move Means for Investors

Posted on July 1, 2019

The Federal Reserve left the federal-funds rate unchanged Wednesday, as expected, at 2.25%-2.50%. The Federal Open Market Committee removed the word “patient” regarding future rate adjustments from its statement, indicating it is more likely to cut interest rates at future meetings than it was in March.

This announcement is good news for us at CGI and for our investor partners. In the tith obvious sense, with additional acquisitions on our horizon, it is advantageous to close at a time when interest rates are the same or lower. In a slightly more obscure sense, the Fed’s decision to keep interest rates the same and Barron’s analysis and prediction that a lower rate may be upcoming tells us a little bit about the market. It suggests that the seller’s market is slowing, which causes an increased buyer’s market. For those sellers who have no option but to sell, we have leverage and buying power. Without question, we are looking forward to the next phase in American economics.

Here’s what other leading experts on the market, the economy, and fiscal policy told Barron’s after the Fed’s announcement.

Alan Blinder, professor of economics and public affairs, Princeton University, and former vice chairman of the Federal Reserve: “The Fed did the right thing today. President Trump and some bond traders may have been clamoring for an immediate rate cut, but they’re always clamoring for something. Patience for now is the right course, even if the FOMC is no longer using that word.”—Sophia Cai

Tom Digaloma, managing director at Seaport Global Holdings: “The post-Fed statement market reaction leads one to conclude that Powell lowered rates without actually doing so. Looking ahead, we still doubt that a rate cut in July is totally justified. Chair Powell highlighted during his press conference that the Fed will try to avoid going ‘prematurely.’ As a result, we conclude that there will be no rate cut in July, especially if equities continue to hold current levels or move higher. Powell is reactive by nature, and it will take an equity market selloff to make the Fed act.”—Mary Childs

Kathleen Gaffney, director of diversified fixed income at Eaton Vance : “The Fed has bought themselves some time, but it’s a very fine line they are walking when they are out of ammunition. They can’t raise rates and are giving the perception that they are going to ease, but we could get to the end of the summer with more positive information on trade and economic data could turn around. That’s a risk not priced into the market. Risk assets are overvalued. The longer the risk-on trade stays on, the greater the opportunities will be. Liquidity is paramount.”—Reshma Kapadia

Jack Janasiewicz, senior vice president and portfolio strategist at Natixis Investment Managers’ Portfolio Research & Consulting Group: “There are a lot of moving parts here. If you want to pick up something that’s good and make a bull case, you’ll find plenty of data out there. If you want to build a bear case, there are plenty of data you can point to as well. There is something out there for everybody, and it’s going to make it a little more challenging for the Fed. When they say they are ‘data dependent,’ you have to take that literally.”—Evie Liu

Hugh Johnson, chairman and chief investment officer, Hugh Johnson Advisors in Albany, N.Y.: “I remain positive on the markets but am braced for the possibility for disappointment.” He says the markets now are anticipating three rate cuts by the Fed—roughly in July, October, and March 2020. If the Fed doesn’t come through with them all, the stock market could suffer. Johnson sees upside potential of 8% in the S&P 500 through the end of 2021. “A lot of the upside potential has dissipated” with the June rally that has lifted the S&P 500 by 6% and put it within 1% of its April peak. He says investors should build some defense into their portfolio with consumer staples, health care, and a smattering of utilities. He’s focused on dividend-paying stocks. since “they’re a cushion in tough times.”—Andrew Bary

Kate Warne, investment strategist, Edward Jones, says the Fed statement was a little more dovish than she expected. “I thought they would use the opportunity to push back a bit on what seems to be the market’s expectations of three rate cuts this year,” she says. “I was a bit surprised that they positioned themselves as being willing to move even more than the market has been anticipating if conditions weaken.”—E.L.

David Campbell, principal at advisory firm BOS Invest, says he wasn’t surprised the Fed didn’t cut. He pointed out its removal of the word “patient” from its statement indicates the policy makers will be more accommodative, consistent with central banks in Europe and Japan. What’s more concerning to him as an advisor is that the market is taking cues from Fed policy more than economic data or earnings reports. “That’s typically what you see toward the end of a bull market,” he says, and it “raises the antennae on risks” that are out there. “We have low rates, inflation, and unemployment, the tech sector is doing well, and the economy is growing in U.S., but investors are still very nervous.”—Daren Fonda

Dan Mendelson, founder, Avalere Health, a health-care consulting firm, says the Fed’s decision to hold off on a rate cut won’t slow the pace of acquisitions in the health-care industry. “I think that it’s a very active transactional market, and it will continue to be because the rate environment is positive and stable,” he says. “There’s no question that a quarter-point rate reduction would be modest positive for some of the companies interested in larger transactions. But I don’t think that the stability is really a bad thing for anyone…. Clearly, if they start cutting rates, it’s going to make some transactions possible that previously were not possible. That could be an additional positive that could come in the next three to six months.”—Josh Nathan-Kazis

Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management, expects the central bank to cut rates in July: “They are not going to risk disappointing the market like they did back in December and January. The cut might be coming at a time when the economic growth prospects are still fairly decent, but they’re going to be cutting for inflation and market expectations…. The market has played defense for a while, and it’s based on the belief that the economic cycle is going to end. I don’t think that’s likely. If the Fed is going to reengineer the inflation, the economic growth prospects will strengthen. Anyone buying bonds now is betting on a recession. Investors are already getting pessimistic: Low-volatility and defensive stocks have worked, and the most crowded trade now is the U.S. Treasuries. I think it’s time to position on the opposite side.”—E.L.

Bill Zox, CFA, chief investment officer, fixed income, at Diamond Hill Capital Management, in Columbus, Ohio: “We have this divergence where equities don’t seem to be too concerned about the probability of a recession over the next year and a half, while the Treasury market is discounting probably something like a 50% probability of a recession between now and the end of 2020…. The most important thing is to be prepared for volatility, especially in risk assets.”—David Marino-Nachison

Jim Baird, chief investment officer at Plante Moran Financial Advisors. The Fed reduced its expectations for inflation in 2019 to 1.5% from 1.8% in March. The change is significant, Baird says, because it signals “a bias toward a rate cut in the coming months, particularly given their previously stated position of erring to the side of letting inflation run hot. The bottom line is that the Fed appears to be focused on walking a fine line, attempting to provide reassurance that the economy remains on track, while still opening the door even further to the potential for rate cuts in the coming months with the goal of extending the current expansion.”—Avi Salzman

Ryan Sweet, head of monetary policy research, Moody’s Analytics, says, “Not cutting was a slam dunk. The probability of them cutting rates was extremely low. But behind closed doors, they are clearly debating what the next action is. The jury is still out on whether the Fed will need to cut rates. The key will be the G-20 meeting next week. If there’s a trade deal [with China], the economy will really take off. But the Fed is ready to act if they need to—it does not want to kill the economic expansion.”—Eric J. Savitz

Anne Mathias, head of global macro, interest rates, and foreign currency at Vanguard, says, “Treasury yields near 2% is kind of an overreaction to what’s happening in the economy. It doesn’t make sense for the yield curve to be this flat with equities near an all-time high…but I think we’re starting to see the limits of monetary policy…. It’s almost like the market is trying to force the Fed to act, which is a really weird environment.”—Alexandra Scaggs

Torsten Sløk, chief economist, Deutsche Bank: “The Fed clearly sees downside risks to the economic outlook,” he says. He sees the likelihood of a rate cut in July significantly higher now, with a 74% chance of a cut, based on fed-funds futures markets: “The market seems disappointed we’re not getting a cut, and it’s saying rates are too high for where the economy is.” Sløk says it makes sense that the Fed wouldn’t cut because of so much uncertainty about trade leading up to the big meeting between President Donald Trump and President Xi Jinping of China. “If the trade war goes away next week,” he says, “it would have significant implications for financial markets and the cloud of uncertainty hanging over businesses around hiring and capex.” Sløk still expects the Fed to cut as an insurance policy against a downturn. “Our assumption is that the trade war is here to stay,” he says. If the trade frictions ease up or if there’s a deal next week, “that would change the outlook in important ways for the Fed.”—D.F.

Jeff Klingelhofer, fixed-income portfolio manager at Thornburg Investment Management: “They sent the signal to the market that they expect to cut rates in the future,” says Klingelhofer, who expects a rate cut announcement next month when the FOMC is scheduled to meet next. “The biggest question I have is, ‘Why didn’t you do it today?’ I don’t know what could change between now and July.” He adds: “They are allowing the market to set the Fed’s rate expectations. I would have expected them to push back against the market and/or admit to the market that inflation has weakened notably.”—Lawrence C. StraussSkanda Amarnath, director, research and analysis, Employ America: “The Fed has consistently undershot on its estimates of maximum employment and its inflation target, all while its space to ease remains constrained. It needs to err on the side of easing swiftly and aggressively…. We hope that the FOMC takes its mandate to pursue maximum employment as seriously as Chair Powell expressed in his press conference. If Chair Powell and the rest of the FOMC are convinced that there is still more slack in the labor market, they should be revising their projections of the longer-run unemployment rate more aggressively, or else choose a better barometer of labor market slack. Too many communities are only now beginning to see the benefits of labor market tightening and there is little reason to believe we have reached a natural constraint.”—Ben Walsh

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