One of the more storied headlines this year has been President Trump’s disappointment with the Fed for not cutting rates. We should all know by now that the President cannot fire a Fed Chair simply because he/she is not lowering interest rates to their liking. Now, that we’ve got that out of the way, let’s turn our attention to what Powell & Co. could have in store in terms of monetary policy for the remainder of the year.
The Fed Chair has been relatively consistent with his messaging of late. Specifically, policy is “well positioned” and the voting members are in “no hurry” to cut rates. This forward guidance at the Powell’s recent Semiannual Monetary Policy testimony before both houses of Congress was a pushback of sorts to comments from Fed Governors Waller and Bowman who indicated they could possibly support a rate cut at the July FOMC meeting.
However, the U.S. Treasury (UST) market seemed to have been looking for any positive clues they could find suggesting a rate cut could come sooner than expected. As a result, when Powell recently stated that “many paths are possible” in terms of policy outcomes and he “wouldn’t take any meeting off the table”, that was just what the bond market ordered. The thought of the door being opened for a July rate cut pushed the UST 10-year yield down to a low of 4.18% to begin the month of July.
Then came the June jobs report. While inflation data have continued to show a ‘disinflation’ trend in recent months, the other part of the Fed’s dual mandate, employment, has been resilient, some would say surprisingly so. In fact, one could make the argument that if the labor market data were showing signs of definitive cooling, like last summer, Powell may have already implemented a rate cut by now. But, against the aforementioned bond market backdrop, in somewhat of an odd twist, the June employment data were being viewed as a potential catalyst for that July rate cut. Once again, though, the labor market data revealed a relatively solid setting, and set in motion the belief, which we agree with, that this report more than likely rules out any easing move later this month.
So, if the markets are still in status quo mode with respect to the Fed, then what comes next? Attention has now shifted to the September convocation where the odds of a rate cut are placed at about two-thirds for such a move, as of this writing.
We have been constantly beating the drum about how highly data dependent Powell & Co. currently are, and that fact has not changed one iota. With the September FOMC meeting relatively far away calendar-wise, the policymakers will be receiving a nice amount of new labor market and inflation data. That being said, perhaps the bond market won’t have to wait until September 17th for official forward guidance.
Indeed, as investors have witnessed in recent years, the Kansas City Fed’s annual Jackson Hole Economic Policy Symposium has served as almost an informal Fed meeting. While no actual policy moves will be occurring, Powell has used this venue to communicate any potential changes to monetary policy that could be forthcoming. This year’s event is scheduled to take place August 21 – 23 and the theme is “Labor Markets in Transition: Demographics, Productivity and Macroeconomic Policy”. Sounds like a perfect setting for a Fed Chair, doesn’t it?
As we said, there’s still a lot of economic data to process, and Powell recently stated that, if there is going to be the first signs of tariff-induced inflation, it should begin to start showing up in inflation reports over the coming months. That got us thinking…what if upcoming CPI/PCE Deflator reports do show signs of not just disinflation being removed, but actual reflation occurring? Interestingly, the timing of this inflation data could also be occurring right around the September FOMC meeting.
While our reasonable case scenario is still for one to two rate cuts this year, to quote former Fed Chair Alan Greenspan…that would be a conundrum for Powell.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
Please see the WisdomTree Glossary for definitions of terms and indexes
Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund before investing. For a prospectus or, if available, the summary prospectus containing this and other important information about the Fund, call 866.909.9473 or visit WisdomTree.com/investments. Read the prospectus or, if available, the summary prospectus carefully before investing.
Past performance does not guarantee future results.
Important Risk Information:
There are risks associated with investing, including the possible loss of principal. Foreign investing involves currency, political and economic risk. Funds focusing on a single country and/or sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Emerging markets, real estate, currency, fixed income and alternative investments include additional risks. Please see the prospectus for a discussion of risks.
This material contains the opinions of the authors, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy or deemed to be an offer or sale of any investment product, and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein.
Kevin Flanagan and Jeff Weniger are Registered Representatives of Foreside Fund Services, LLC.
WisdomTree Funds are distributed by Foreside Fund Services, LLC.
© WisdomTree, Inc.
Read more commentaries by WisdomTree, Inc.
