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The Fed Cuts Rates Again: Wealth Managers React

Editorial Staff, September 19, 2019

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The US central bank cut interest rates again - catching heat from President Trump for not going further. Wealth managers give their views.

The US Federal Reserve cut interest rates by a further 25 basis points yesterday, cutting its benchmark rate to a range of between 1.75 per cent and 2 per cent. It said that muted inflation pressures and economic uncertainties justified the move. Perhaps unsurprisingly, President Donald Trump scolded the central bank for not being even bolder in cutting rates. The Fed cut rates by 0.25 per cent in July. 

The US-China trade protectionism fight, coupled with concerns that the US economy is slowing, are factors behind the Fed’s move. The US Treasury bond yield curve is inverted – often a sign (not always accurate) that a recession is in the offing. With America heading to the polls in November next year, Trump understandably doesn’t want to fight to retain office against a backdrop of negative numbers. Critics might demur that a country that has had strong growth, with low unemployment and low inflation, needs even lower rates. 

As pointed out recently by Goldman Sachs, the US equity market is not particularly overvalued, and the financial sector has moved from a highly leveraged position pre-2008 to one where arguably it has swung too far the other way. Without some return to more “normal” interest rates, a hunt for yield in illiquid areas such as private credit and equity will continue. At some point, high asset values and strains stemming from ultra-cheap credit will cause problems.  

We carry views from wealth managers, economists and other parties about the cut. Most of the comments came out during the Asian and European time-zones; we can add those from the North American markets when they come in. Email tom.burroughes@wealthbriefing.com

Lee Ferridge, head of multi-asset strategy, the Americas at State Street Global Markets
At its September meeting, the FOMC delivered the 25 basis point cut widely that was expected (it was 100 per cent priced in by the market), but pushed back on the prospects of much looser policy to come. The market had been pricing one more cut for this year and at least three over the next 12 months. However, the FOMC “dots” failed to confirm this dovish stance and, while the Fed has left the door open to more cuts if needed, these are far from a done deal. Generally improved domestic data, the highest core consumer price index (CPI) reading since 2008 and its own models indicating that rates should remain largely on hold explain the Fed’s stance. A less accommodative Fed is likely to be bad news for risky assets (equities and high-beta/EM FX) while it is also likely to lead to further yield curve inversion. Expect the dollar to rally to new highs.

Antoine Lesné, head of EMEA strategy and research for SPDR ETFs, State Street Global Markets
As widely expected, the FOMC cut 25bps at today’s meeting. However, they failed to deliver the looser policy message that the market wanted leaving additional information for the December meeting. A positive turn with economic indicators for the US economy and an upward trajectory in core CPI (from low levels) put the Fed in a challenging spot to yield to the pressures of the Trump administration. This less dovish backdrop may weigh on risk assets, while yields could rise a little more, but we don’t expect that move to be as strong as in the recent week. Meanwhile the case for a strong dollar remains well anchored.

Sonal Desai, fixed income chief investment officer, Franklin Templeton
Chairman Jerome Powell’s message in the press conference following the meeting, however, was more carefully calibrated than in the past - in my view - and it had a sobering effect. While the market’s immediate reaction was disappointment, I believe the Fed needed to rein in market expectations on the future path of rates. This was a reasonable first step. With two rate cuts under his belt this quarter, Powell said he expects this latest monetary easing to have an impact with the usual long and variable lags; and, he noted that the Fed expects growth to remain solid, the labor market to stay strong and inflation to gradually move up to its target.

The Fed stated it will keep monitoring trade uncertainty and the recent weakening in Europe and China. However, the US outlook remains unchanged, with strong household consumption and a cautious business sector. And while the Fed can’t eliminate trade uncertainty, Powell expressed confidence that the Fed’s moves will support durable goods consumption, the housing sector, and consumer and business confidence. In other words, the message from the Fed is that there is no reason to panic, we are not on the verge of a recession, and there is no reason to expect massive further monetary easing.

John Vail, chief global strategist, Nikko Asset Management
Given the Grand Canyon split between the hawks and the doves, the fact that the markets, after some initial wobbles, remained relatively stable after the meeting indicates that the Fed’s guidance to the markets was successful and that the markets broadly agree with the result given the conflicting macro data, the trade war and the other major geopolitical uncertainties extant, with equities tending to look on the bright side and bonds looking on the dark side.

There were tweaks to the statement, the projections of macro-economic data and the dots, but nothing very significant in sum, with some tweaks being dovish and some more hawkish. Just like the rest of the world, the Fed is waiting for key political issues to be resolved before making major commitments. We expect one more 25 bps cut in the 4Q, but the future thereafter is “data and politics”-dependent. With the surge in housing starts announced today, even a 25 bps cut ahead is not a certainty.

Andrew Wilson, chief executive officer of Goldman Sachs Asset Management International for EMEA and head of global fixed income
Looking ahead, we think Fed policy will be guided by growth and trade policy, with the two being closely linked. In a scenario of improving growth and a de-escalation of trade tensions, we would expect unchanged policy until core inflation picks-up on a sustained basis. Should growth remain lackluster and trade policy uncertainty remain elevated, we think the Fed will carefully curate its communications to preserve policy optionality, which will likely include additional rate cuts. More broadly, we think contained inflation has allowed policymakers to maintain accommodative monetary policies in order to preserve the expansion phase of the cycle. 

Investec
Investors were left most surprised by the FOMC’s ‘dot plot’ projections in which the Committee had not, on the whole, shifted to pencil in a series of rate reductions going forward. Indeed, the median view for the appropriate Federal funds rate was for this to be steady through the remainder of 2019 and 2020. This was in sharp contrast with investors who had been betting on several more quarter point rate reductions by the end of next year. The extent of divisions on the Committee in the ‘dot plot’ forecasts was also notable. For example, this year seven members saw appropriate rates as being lower by year-end, five the same and five higher. And divisions were similarly notable for future years too. This served to highlight the extent of dissent Chair Powell will face for almost any forward policy path he chooses to plot.

Bank of Singapore
We make no change to our asset allocation strategy for now. Our baseline scenario is that the global economy will bend but not break, and we do not expect a recession in the next 12 months. Our overall positioning reflects prudence given structural downside risks posed by persistent US-centric trade policy uncertainties, rising geopolitical tensions in the Middle East, a still muddled global economic outlook, and uncompelling valuations. 

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