The Fed – Tapping on the Accelerator - July 30, 2019

The Fed will announce its rate decision on Wednesday.

  • A rate cut is virtually assured.
  • Most observers anticipate a 0.25 percentage-point cut in the fed funds rate to 2.00-2.25%. A few see 0.50 percentage points.

A reduction of ¼% will likely have little impact on investors as it’s priced in. How the Fed frames its outlook is in view.

The economy is expanding

GDP expanded in Q2 at an annualized pace of 2.1%. Business spending was soft, but consumer spending posted a strong 4.3% advance (U.S. BEA data).

Possible Fed scenarios

  1. One and done. Consumer spending consumer and confidence are strong. The need for another cut has diminished – underlying economic momentum.
  2. The Fed maintains a dovish bias without telegraphing a cut, but emphasizes the economy is solid.
  3. The Fed emphasizes the uncertain global economy, trade tensions, low inflation, and telegraphs it remains in an easing mode.

Investors have been betting on scenario 3. Investors are pricing in another rate cut in September and a possible third by December (CME Group).

Something in the ballpark of the first two scenarios would represent a shift from Fed Chief Powell’s testimony earlier in the month.

Investor’s corner

If the Fed dampens rate-cut expectations, short-term volatility may ensue. Ultimately, economic growth and profit growth are the long-term drivers of stock prices, one that a diversified financial plan is designed to capture.