As Rate Cuts Near, Investors Assess Fed’s Soft-Landing Strategy

As Rate Cuts Near, Investors Assess Fed’s Soft-Landing Strategy

Sub: Eco

Sec: Monetary  Policy

• Fed’s Plan for Rate Cuts:
  • Fed Chairman Jerome Powell indicated a potential rate cut in September if inflation cools.
  • This is the strongest signal yet of easing monetary policy soon.
• Investor Concerns:
  • Soft Landing Feasibility:
    • Some believe the Fed may have kept rates high for too long, risking the chance of a soft landing (lowering inflation without hurting growth).
  • Reigniting Inflation:
    • Easing monetary policy when the economy is robust could reignite inflation, limiting the extent of rate cuts.
• Market Reactions:
  • Futures Pricing:
    • Futures tied to the Fed’s policy rate show an 87% chance of a 25 basis-point cut in September.
  • Stock Market Performance:
    • S&P 500 closed up 1.6%, but Wall Street’s indexes nosedived after new economic data suggested potential recession risks.
• Treasury Yields:
  • Two-Year Treasuries:
    • Yields dropped about eight basis points to 4.278%, the lowest in nearly six months.
  • Benchmark 10-Year Yields:
    • Shed nearly four points to 4.1%.

Concerns

• Too Late for Soft Landing?
  • Resilient U.S. Economy:
  • Employment data shows resilience despite high interest rates.
• Rising Jobless Rate:
  • Policymakers are focusing on avoiding sharp unemployment increases, a common result of high interest rates and slowing inflation.
• Economic Fraying:
  • Concerns if fraying at the edges will lead to a full-blown slowdown (Peter Baden, Genoa Asset Management).
• Lag Effect:
  • Timing of Rate Cuts:
    • Some worry it will take too long for rate cuts to stimulate growth.
• Risk of Recession:
  • Starting cuts in September may not be enough to alter the economy’s course going into 2025 (Jack McIntyre, Brandywine Global Investment Management).
• Immediate Rate Cut Call:
  • Former NY Fed chief Bill Dudley advocates for an immediate cut, citing the Sahm Rule (rising jobless rate as a recession indicator).
• Shallow Rate-Cutting Cycle:
  • Inflationary Rebound Risk:
    • Lower rates could spark inflation similar to earlier this year (Hans Mikkelsen, TD Securities).
• Market Rotation Impact:
  • A shallower-than-expected rate cut could disrupt market rotation into small-cap stocks and other beneficiaries (Jack Janasiewicz, Natixis Investment Managers).
• Asset Prices:
  • Current Gains:
  • Impressive gains in U.S. stocks might mean Fed easing is already factored into asset prices, limiting future upside.
• Historical Performance:
  • S&P 500 data shows lower gains post-rate cut compared to between the last hike and first cut.
• Equity Market Valuations:
  • 10-year Treasury likely to stay around 4% for the first half of 2025, with equity market valuations appearing “pretty full” (Tony Rodriguez, Nuveen).

In conclusion, while there is optimism about achieving a soft landing with potential rate cuts, significant risks and uncertainties remain, including the timing and impact of these cuts on both inflation and economic growth.