Only two weeks ago Fed Chair Powell said “the FOMC are not thinking about rate cuts”. And it was premature to conclude with confidence they are at a sufficiently restrictive level. Well forget all that. Powell performed one of the more remarkable pivots ever seen from the Fed. He pivoted 180 degrees from his sentiment barely 14 days ago. Powell is now talking three rate cuts next year and the Fed have essentially “won the battle” over inflation. My take is the Fed is now more concerned about the business cycle; i.e., recession. There is a reason the Fed will cut – and that is the risk of dislocation in the economy (i.e., recession)
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Cautious… But Invested
It’s a brave person who is short the market. Probabilities suggest we are headed higher in the near-term. For example, previous episodes of Fed pausing suggests stocks typically gain. My sentiment today is best described as ‘cautious… but invested’. To that end, one should always be invested to some extent. And whilst it’s always unwise to be completely remiss of the risks — it would be an even greater mistake not to have some exposure to higher quality risk assets and fixed income (at current yields)
Two Reasons the Fed Could Cut Rates
The latest set of economic numbers support a ‘goldilocks’ scenario for stocks. For example, durable goods orders continue to fall (a positive for inflation); and employment remains robust (a positive for growth). The question is what could cause the Fed to cut rates mid next year (given this is what is priced in)? I will offer two reasons… both of which I think are unlikely before June.