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Economic Insights

Lord Abbett experts explore the potential investment implications of the U.S. Federal Reserve’s policy move on July 31.

In one of the more closely watched monetary policy decisions in recent memory, the Federal Open Market Committee (FOMC), the rate-setting arm of the U.S. Federal Reserve (Fed), announced a 25 basis point cut in the fed funds rate on July 31, its first such move since 2008. In support of its action, the FOMC said in its policy statement that “in light of the implications of global developments for the economic outlook as well as muted inflation pressures,” it decided to lower the target range for the federal funds rate to 2-2¼%. The FOMC added that it “will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2% objective.”

How might this decision influence the economy and key asset classes in the months to come? We surveyed three Lord Abbett experts for their views:

Kewjin Yuoh
Partner & Portfolio Manager, Taxable Fixed Income
As expected, the Fed met the market’s demand for a rate cut on July 31.  And further meeting market expectations, the Fed cited the fragility of the trade and global growth environment and reiterated its readiness to respond to maintain easy financial conditions supportive of growth.  Policymakers also mentioned the low inflationary environment and a desire to move inflation higher as a current goal of the committee.

The market reaction thus far would suggest investors were looking for a more dovish tone with higher certainty of future rate cuts.  The yield curve appears to have discounted future rate cut expectations and has flattened on the disappointment.  In our view, the flatter yield curve, while a driver of underperformance of risk assets, should be supportive of a continued low-volatility environment; to the extent the economic data continues to show strength, risk assets should recover on the stronger fundamentals.

Brian Foerster
Investment Strategist, Equities
The Fed left the door open to further easing should growth continue to decelerate, combined with scant inflation.  As much hand-wringing and immediate market volatility this action (or lack thereof) causes, we believe that at these historically low absolute interest rate and inflation levels, minor moves such as this are of minimal consequence to our outlook for equities in the near-, medium-, and long term.  The important event related to central bank policy occurred in January 2019, when Fed Chairman Jay Powell’s public statements turned first to cautious and then to a decidedly more dovish tone by the end of the month.  That public shift alleviated the market’s greatest concern that a prolonged rate-hiking policy would choke off the expansion, and prompted a sharp unwind of the fear-driven bear market in the fourth quarter of 2018. 

What we believe is far more important for investors, instead, is that the pace of innovation in secular growth areas such as biotech, ecommerce, cloud software, and artificial intelligence continues to accelerate in an otherwise slow-growth world.  We believe this innovation boom is itself deflationary to the economy, and we therefore don’t anticipate strongly rising inflation or interest rates any time soon (maybe not even for another decade).  As such, we continue to look to take advantage of how much the market continues to underestimate this technological boom while still remaining vigilant and ready to shift should there be a macro shock or more severe recessionary signals. 

John Morton
Portfolio Manager, Emerging Markets Debt
Easier financial conditions are almost always positive for emerging market debt. The Fed’s easing trend will give further degrees of freedom for emerging market (EM) central banks to reduce their rates without concerns for their currency. With larger interest rate differentials, between advanced and emerging markets we should see further global capital flows going to the emerging world. These flows, if realized, will facilitate higher growth for emerging markets. EM central banks in Chile, India, Indonesia, Malaysia, Russia, South Africa, Turkey, and the Philippines have already responded by reducing policy rates in 2019.

 

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