Fast forward six months to July 2019, and we have broad-based consensus that the Federal Reserve is going to actually cut rates during their July 30-31 meeting. The debate is no longer about whether the Fed will cut rates this year \u2013 it is now about how much and how often <\/em>they will loosen monetary policy in 2019.<\/p>\n So how did we get here?<\/strong><\/p>\n Federal Reserve Chairman Jerome Powell cited growing uncertainties in the global economy, which arguably was<\/p>\n in reference to downstream impact of the ongoing trade dispute between the United States and China. The trade impasse, coupled with an economic expansion now in its 10th<\/sup> year, have resulted in slow deterioration in business sentiment and global decline in manufacturing PMIs \u2013 a leading indicator. Even though in my view the base case for U.S. and global economic growth remains 2% or more for 2019, the Fed appears poised to act proactively to protect against downside risks.<\/p>\n Then there\u2019s the issue of inflation. Mr. Powell noted this week that there was once a time when central bankers were primarily concerned with too much inflation in the economy. Today, the challenge is just the opposite \u2013 not enough inflation even as the unemployment rate hovers below 4%.2<\/sup> As you can see on the chart below, before the 2008 Financial Crisis inflation would regularly run higher (above the red line) than the target 2%. But since the Financial Crisis, from 2009 to today, inflation has struggled to sustain above 2%.<\/p>\n Inflation Has Struggled Over the Last Decade to Remain Above 2% (red line)<\/strong><\/p>\n It is debatable whether lowering rates now would provide any trigger for inflation, as I would argue that lower rates probably won\u2019t lead to wage pressures and definitely won\u2019t lead to growth in M2 money supply. Instead, lowering rates now seems to be a move designed to sustain an expansion that is dying of natural causes, in my view. Business cycles have historically always come to an end.<\/p>\n The stock market offers a different narrative as it relates to rate cuts. In December of last year, the S&P 500 had touched bear market territory just days before Mr. Powell made his announcement to be \u201cpatient\u201d in the Fed\u2019s monetary policy approach. Almost to the day that the Fed changed their stance, the market started to rally and is up over 20% year-to-date (as I write). In my view, there is no denying that the market\u2019s current rally is tied to the Fed\u2019s actions.<\/p>\n Bottom Line for Investors<\/strong><\/p>\n What I believe we\u2019re left with now is a heightened possibility of a negative surprise. When interest rate cuts are fully baked into equity prices, it becomes more likely that the market is surprised to the downside than to the upside. What happens if the Fed cuts rates at the July meeting, but then also signals that future rate cuts are less likely than currently believed? Will the market be disappointed, volatile, and possibly enter another sharp correction? I believe so.<\/p>\n I think the Federal Reserve has effectively painted themselves into a corner where anything less than two rate cuts in 2019 will result in a \u2018tantrum\u2019 in the equity markets. Strong earnings reports could neutralize the impact of not lowering rates two times or more, but I strongly believe now that the stock market\u2019s fate in 2019 is wound up in Fed policy.<\/p>\n","protected":false},"excerpt":{"rendered":" What a difference six months can make. In December of 2018, the Federal Reserve made a slight adjustment to its […]<\/p>\n","protected":false},"author":3,"featured_media":4789,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-7491","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7491","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=7491"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7491\/revisions"}],"predecessor-version":[{"id":8835,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7491\/revisions\/8835"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=7491"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=7491"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=7491"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}![\"\"](\"https:\/\/zacksim.com\/financial-professionals-insights\/wp-content\/uploads\/2022\/02\/2019-07-20-MOTM-Image-1-of-1.png\")
Source: Federal Reserve Bank of St. Louis3<\/sup><\/em><\/strong>\u00a0<\/em><\/strong><\/p>\n