Rathbones’ Bryn Jones comments on the US Federal Reserve’s rates decision and whether, based on past performance, a recession will be the outcome.
This was a very exciting meeting for bond geeks as well as other asset investors. We went into this with a lot priced in ahead of this Fed meeting. The differential between the two-year and the Fed funds rate was at the widest I’ve seen in my working career, so the Fed buckled to the bond market’s intimidating whims. We also went into this meeting with the most uncertainty about a rate decision in about 15 years.
Inflation still remains, excess savings are still just at trend, Atlanta GDP is at 3%, and despite an uptick in unemployment, it is still low, but the Fed obviously felt it was time to cut by 50bps.
The Wall Street Journal flagged a 50bps cut last week and this seems to have come to fruition. The market seems to have been prepped!
Generally, whenever rates go up, recessions do eventually occur, but the timing of those recessions can be anywhere between one year and several years, after the first hike. It seems to be that the Fed is worried about the probability of this happening now – or is this a pre-emptive strike to keep the economy close to full employment?
They started cuts in 2001 and 2007 with 50bps and what is so interesting about that is that recessions came within three to four months. Despite this, there has been a rally in risk. Should we now be worried about the same? Only data will tell.
The Summary of Economic Projections (SEP) and dot plot and Statement are equally as important. The 2.9 to 4.1 range for next year is a massive range and we saw the first dissent from a Fed official since 2005 … The median dot plot is marginally dovish, but the reaction of the bond market is muted at the break of the news due to most action being priced in. The front end has barely moved and long end is weaker, perhaps on inflation worries?
