- A Goldman economist informed investors on Monday that he does not expect the Fed to cut rates this year.
- His note said: “Although it is a close call, we still expect the FOMC to keep the funds’ rate unchanged in the remainder of the year,”
- Fed’s Powell only last week said the Fed would act “as appropriate” with regards to rate cuts. The market too this as an omen that rate cuts are coming, and fast. The S&P futures rallied 0.7% on the back of the news & the Dow Jones index followed.
- We believe that the market today reflects a rate cut is coming this year, despite Goldman’s predictions.
Will the Fed wait till september?
We estimate that we will get a cut after September. A rate cut will be beneficial for creating demand-pull inflation – it’s this type of inflation what drives economic growth.
“Demand-pull inflation is used by Keynesian economics to describe what happens when price levels rise because of an imbalance in the aggregate supply and demand. When the aggregate demand in an economy strongly outweighs the aggregate supply, prices go up. Economists describe demand-pull inflation as a result of too many dollars chasing too few goods.”
Demand-pull inflation results from strong consumer demand. Many individuals purchasing the same good will cause the price to increase, and when such an event happens to a whole economy for all types of products, it is called demand-pull inflation.” Source: Investopedia
Why do we think the Fed will cut?
The Fed has been under scrutiny for some time regarding the raising of rates. We have been in—and still, are in—a low rate environment. The Fed has raised rates many times under the Trump administration & Trump regularly pushes back on the Fed. We are now at a point where the economy could be heading into a little turbulence. We believe the recent household survey shows that consumers expect some trouble shortly, although it should be short-lived.
What can cause turbulence?
We foresee the US GDP to remain in a low growth situation. The China Trade War will not be finished by September. This, in turn, would cause the US economy to slow. The Fed would then need to step in and support the economy.
Although the stock market does not reflect the economy directly, most believe that it is a leading indicator of things to come. The stock market as a whole has been showing some signs of turbulence over the past few months.
However, it’s worth regarding that we are up 12% on the Dow (YTD). 12% is significantly higher than the average yearly gain. We are following portfolios closely and considering deleveraging exposure to reduce risk.