Fed cuts rates; where do we go from here?

08.05.19

The U.S. Federal Reserve (Fed) announced a much-anticipated one-quarter-percentage-point cut to the federal funds rate on Wednesday – the first such move in more than a decade. The benchmark rate now sits at 2.00% to 2.25%. The rate cut is seen as a pre-emptive move based on increasing pressures from trade turmoil and uncertainty about the strength of global economic growth.

“This week’s rate cut by the Fed was widely expected. Equity markets had been anticipating a rate cut, but Fed Chairman Jerome Powell’s press conference commentary was perceived as unexpectedly hawkish and hence markets reacted in a ’buy the rumor, sell the news’ reaction. As active investors, we believe that the equity markets will follow the underlying fundamentals of businesses,” said Dan Hanson, CIO of Ivy Investment Management Company (IICO). “On balance, we are seeing continuing positive economic growth, a supportive policy backdrop and healthy corporate prospects.”

Ivy’s base case at the start of the year forecast up to two rate increases in 2019. However, based on concerns over trade and global growth, we believe the Fed will continue to become more accommodative. In addition to this week’s move, we anticipate one or two more cuts by the end of the year.

“I think the response of the Fed has been appropriate considering the environment. The fixed income market is pricing in two cuts in 2019, so if that happens there shouldn’t be much response,” according to Mark Beischel, global director of fixed income for IICO. “The outstanding question is trade – if we reach a trade deal, then management that wants to reinvest in their companies can get that done without lingering uncertainty.”

The move by the Fed comes after the July 26 report on second-quarter U.S. gross domestic product, which showed 2.1% growth but trade impacting the U.S. economy. Negotiations between the U.S. and China stalled again this week, furthering concern over the impact to growth. Ivy still forecasts global growth at 3.2% in 2019 but with risks to the downside. We believe the underlying fundamentals — a robust job market, rising wages and low inflation — should support continued growth during the rest of 2019.


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