July 09, 2020
July Investment Bulletin
June key drivers
In spite of recent evidence of a surge in new COVID-19 cases across...
Gary Pzegeo, CFA
October 30, 2019
The FOMC did as the market expected by cutting short-term rates 0.25%. Forward guidance from the Fed has been more difficult to discern. Chairman Powell described prior rate cuts as insurance against weak global manufacturing and uncertain trade policy rather than the beginning of a prolonged easing cycle.
Regardless, markets tended to project multiple rate cuts extending through next year. With its press release and post-meeting press conference, the Fed has sent its clearest signal to-date that they are likely to pause the current easing program. At the same time, Chairman Powell calmed markets by setting a high bar for tighter policy.
Here is a summary of the release:
Characterization of the economy was consistent with the release from September. Consumer fundamentals remain strong while business spending and exports are weak. Market implied levels of inflation remain below the Fed’s target.
The Fed removed the phrase “act as appropriate” from its press release. The Chairman later stated that the current stance of policy would likely remain appropriate as long as incoming information about the economy was broadly consistent with their outlook. Taken together, it appears the Fed is signaling a pause in easing for the December meeting. Powell went on to say that it would take serious and sustained inflation to push them to raise rates.
The Fed cut its target range to 1.50% to 1.75%. Dissents fell from 3 in September to 2 currently. The two current dissents continue to come from members calling for no change in policy. Importantly, St. Louis Fed President James Bullard dropped his September dissent for more aggressive easing. Steady policy appears to have broad support in the committee.
Capital markets originally feared a hawkish turn from the Fed until Chairman Powell made it clear that rate hikes were highly unlikely. Treasuries and equities were both in positive territory following the press conference. The Treasury yield curve was marginally flatter as markets lowered expectations for easing in short term yields.
Gary Pzegeo joined the firm in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.
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