Investment Clock insights

US rate cut & press conference: "Mid-cycle adjustment"


Hiroki Hashimoto and Melanie Baker

1 August 2019

As expected, the FOMC decided to cut rates 25bp at yesterday’s meeting to 2-2.25%. They also said that they will end balance sheet run down in August - earlier than previously indicated.
Hiroki says…
This was a first rate cut by the Federal Reserve since December 2008 but it wasn’t a surprise to see stock markets having a wobble given high expectations going in. If investor sentiment gets depressed then this could be a good opportunity to buy the dip in stock markets. 
Whilst global growth is still slowing and the business confidence is still being impacted by trade fears, financial conditions have improved substantially from December last year and the change to an easier policy from the Fed has also already provided breathing space for other central banks to ease. 
We’re moderately overweight stocks and short duration high yield. We have been favouring the US dollar and the US which works as a good complement to our pro-risk position.
Melanie says…
Mid-cycle adjustment – not the start of a long series of cuts: Powell in the press conference described the action today as a “mid-cycle adjustment”. He said that they would be data dependent and were “doing what they needed to do to support the expansion”.  He kept signals about the near-term path for rates minimal, but did importantly (eventually) clarify that he didn’t say he was talking about only one cut. 
Having been given the label ‘mid-cycle adjustment’, it makes sense at this stage to assume that the FOMC will decide to cut again later this year, especially with trade uncertainty looking likely to linger between now and then and a lack of global economic ‘green shoots’. 

As expected, the Federal Open Markets Committee (FOMC) decided to cut rates 25bp at yesterday’s meeting to 2-2.25%. They also said that they will end balance sheet run down in August – earlier than previously indicated.

Hiroki says…

This was a first rate cut by the US Federal Reserve (Fed) since December 2008 but it wasn’t a surprise to see stock markets having a wobble given high expectations going in. If investor sentiment gets depressed then this could be a good opportunity to buy the dip in stock markets. Whilst global growth is still slowing and the business confidence is still being impacted by trade fears, financial conditions have improved substantially from December last year and the change to an easier policy from the Fed has also already provided breathing space for other central banks to ease. We’re moderately overweight stocks and short duration high yield. We have been favouring the US dollar and the US which works as a good complement to our pro-risk position.

Melanie says…

Mid-cycle adjustment – not the start of a long series of cuts: Powell in the press conference described the action today as a “mid-cycle adjustment”. He said that they would be data dependent and were “doing what they needed to do to support the expansion”.  He kept signals about the near-term path for rates minimal, but did importantly (eventually) clarify that he didn’t say he was talking about only one cut. 

Having been given the label ‘mid-cycle adjustment’, it makes sense at this stage to assume that the FOMC will decide to cut again later this year, especially with trade uncertainty looking likely to linger between now and then and a lack of global economic ‘green shoots’. 

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