Economic Insights
Gauging the Impact of the Fed’s Rate Cut
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.
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.
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.
A 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.
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.