An expected third straight rate cut by the Federal Reserve was communicated by the FOMC as the US economy kept losing steam on a quarterly basis. This was a trend observed since the beginning of the year.
Key labour economic metrics remain strong, on average, with unemployment rate remaining low. In addition, household spending kept beating ahead whilst business fixed investment and exports showed signs of weakness. As per Fed
dual mandate, it seeks to maximise employment and provide price stability.
Accordingly, it was deemed appropriate to cut rates by 25bp in order to sustain the late mid cycle. In his speech, Fed chair Jerome Powell explained that the move was conducted “in the face of global developments and to provide some insurance against ongoing risks”
Why has the Fed cut the Federal Funds Rate by 25bp for the third time this year?
Weakness in the US economy has perforated when one compares quarter on quarter economic data. Economic activity measures, such as Real GDP, consumer sentiment and Manufacturing PMIs all experienced a fall. Similarly, inflationary measures such as Producer Price Index Final Demand and market expected inflation saw declines over the quarter. Concerns were raised for industrial production and private investment in that they fell sharply over the quarter. Comparative economic analysis with last year’s data shows a worsened picture. This led to the implied Federal funds rate probabilities to hover above 90% prior to the Fed announcement.
What are forward expectations on Fed intervention?
The Fed Chair Jerome Powell was eloquent in outlining that the FOMC does not see the need for any short term monetary adjustment given the current baseline outlook as well as incoming information on geo-political events. Notwithstanding, the Fed reiterated its position to change monetary stance in the wake of material shocks to the US economy. Intuitively, investors will have to alter Fed action expectations in line with new developments on the economic end as well as global developments.
Impact on US Equity market
Market reaction to the Fed announcement was minimal as Fed chair Powell, initially delivered hawkish lingo which momentarily nerved markets, but sounded more dovish as the press conference went on; which returned calmness in markets. Equity markets are currently assured by the fact that the current weak economic dataset for the US economy is well supported by Fed action. This reduces overall market risk premium which has a positive impact on equity as an asset class. Investors will now shift their attention to other risk premiums, including ongoing earnings season, global risk events (primed by the US-China Phase One agreement uncertainty) and other idiosyncratic developments which will determine overall US equity returns.
This article was issued by Jesmar Halliday, Discretionary Portfolio Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.