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Economic Insights

Federal Reserve Board (Fed) Chairman Powell suggests the Fed has already provided quite a bit of stimulus, making it less urgent to provide even more.

If the Federal Reserve Board’s (Fed) definition of successful communication – i.e., issuing a Federal Open Market Committee (FOMC) statement and holding a subsequent press conference – is that market prices don’t move very much from start to finish, this was not a brilliant performance.

Fed Chairman Jay Powell justified yesterday’s 25 basis point (bp) rate cut and accelerated ending of balance sheet contraction as being necessary for the following reasons:

  • To support the U.S. economic expansion
  • To help offset the effects of weak global growth and trade policy uncertainty
  • To support inflation that has dropped farther below the 2% target

All of that was expected. But during the press conference he explained the actions in a way that suggested the market was too aggressive in pricing in future rate cuts. First, he said that the Fed had already eased substantially since last December by removing the bias towards rate hikes, taking a “patient” stance with regard to potential future rate increases, and, now, cutting by 25 basis points (bps). Given the lags inherent in Fed action, this suggests the FOMC believes it has already provided quite a bit of stimulus, making it less urgent to provide even more. Thus, in a sense, the FOMC believes it has already eased much more than once, requiring fewer additional cuts.

Second, Powell explicitly said that today’s move was designed to provide mid-cycle accommodation and that it wasn’t the beginning of an extended series of rate cuts. He later tried to clarify that he didn’t mean they couldn’t cut again and that he simply meant to say that he didn’t think this was comparable to the type of rate cutting cycle the Fed initiates when it is trying to counterbalance a potential recession. Still, he did leave the impression that the market was too aggressive in pricing in the cuts. And the reaction in the fed funds futures market was pretty immediate; the market reacted by taking out one of the expected rate increases over the next year (although prices have bounced back somewhat).

Third, he seemed to be reading from a prepared text in response to questions about the likely future policy path. The statement he read (and this is a paraphrase) was something like: Policy depends on the economic outlook based on incoming data and risks to that outlook. Inasmuch as recent data mostly surprised to the upside and trade tensions have abated somewhat, the statement doesn’t sound like the Fed believes it will have to provide a lot more accommodation.

During and after the press conference, the yield curve flattened.  Stocks fell very sharply (although they are recovering more recently). And the U.S. dollar strengthened.

Thus, the market didn’t seem to like Powell’s message, as they interpreted it as a tightening relative to expectations. This bearish interpretation was supported by the fact that two voters on the FOMC dissented in favor of unchanged rates (some of the non-voting regional bank presidents are also known to be against rate cuts at this time), making another future rate cut at the September FOMC meeting somewhat less likely than if the committee had been unanimous in today’s action.

The FOMC believes it telegraphed its intentions to the market pretty clearly before today’s meeting, so they must be disappointed that the response wasn’t more measured. Maybe they are starting to wish they had stuck to giving press conferences after every other FOMC meeting instead of after every meeting.

 

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. U.S. Treasuries are debt obligations issued and backed by the full faith and credit of the U.S. government. Income from Treasury securities is exempt from state and local taxes. Although Treasuries are considered to have low credit risk, they are affected by other types of risk—mainly interest rate risk (when interest rates rise, the market value of debt obligations tends to drop) and inflation risk. The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. The securities markets of emerging countries tend to be less liquid, especially subject to greater price volatility, have a smaller market capitalization, have less government regulation and may not be subject to as extensive and frequent accounting, financial and other reporting requirements as securities issued in more developed countries.

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Glossary of Terms

Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes.

basis point is 1/100 of a percentage point.

The Federal Funds Rate (fed funds rate) is the interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight.

The Federal Open Market Committee (FOMC), the policy-setting arm of the U.S. Federal Reserve, issues projections of the rate of U.S. economic growth at the conclusion of its meetings in March, June, September, and December of each year.

yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education.  No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.   If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in the preceding commentary are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

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