Rates cut again–what is the Fed trying to tell us?

by: , Economist and Multi-Asset Portfolio Strategist, New York Life Investment Management; Multi-Asset Solutions team, Multi-Asset Solutions team, New York Life Investments

What did the Fed do?

On September 18, the Federal Reserve made three decisions that are relevant for investors:

  • The Fed lowered interest rates by 0.25%, to a range of 1.75% – 2.00%. The Fed expects the U.S. expansion to continue but wants to cushion the economy against downside risks.
  • The Fed revised down its expectations for interest rates over the next three years. It still expects rates to hover near 2.5% in the long term.

Implied Fed Funds Target Rate

  • The Fed made– and signaled – some tweaks regarding its support of money markets. This is mostly a technical adjustment, but it helps the Fed to improve its support of market liquidity in the event of a future panic.

Monetary policy has moved from “sure thing” to “big risk.”

Central banks have moved more supportive of the global economy in recent months. They’ve also been a bit easier to predict; investors have received the news they expected – or in some cases even more dovish – which is supportive of financial markets.

The path from here is less certain. In the U.S., the market expects at least one more rate cut this year, with another in early 2020. Without a further deterioration in the U.S. economy, Fed Chair Jay Powell may not have the consensus to be as aggressive as the market expects. This could create room for disappointment, particularly in equity markets where valuations have relied heavily on lower interest rate expectations.

What does this mean for investors?

These moves were widely expected, so we should see minimal or slightly positive market reaction in response to the Fed’s decisions, all else being equal.

For most investors, today’s interest rate policy change should not impact their investment mix. Instead, investors should consider how the move fits into the Fed’s policy trajectory and broader economic outlook. Here we have two key takeaways:

  • Stay invested. The U.S. consumer remains robust, and the Federal Reserve is stepping in to support the economy against risks. It is too early for investors to run for the hills.
  • Be cautious. The economy is late in its cycle, valuations are high, and risks are strong. We are moving gradually more cautious in our portfolios focusing on generating income and diversifying our exposures.

What is next?

In recent weeks, market movement has correlated with higher expectations for global economic growth. Bond yields have risen, and cyclical sectors have outperformed. We think it is too early to take this approach. In the absence of a catalyst for economic growth, such as a reliable trade truce or further fiscal stimulus, slowing economic growth and heavily weighted risks will likely dominate market sentiment through the end of the year.

 

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

“New York Life Investments” is both a service mark, and the common trade name, of the investment advisors affiliated with New York Life Insurance Company.

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Lauren Goodwin, CFA

Economist and Multi-Asset Portfolio Strategist, New York Life Investment Management

Lauren Goodwin, CFA is an economist and multi-asset portfolio strategist with New York Life Investment Management’s Multi Asset Solutions (MAS) team, which has $10B in assets under management. She joined NYLIM in 2018 to focus on global macroeconomic trends

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Multi-Asset Solutions team

Multi-Asset Solutions team, New York Life Investments

Multi-Asset Solution’s (MAS) is New York Life investments’ specialist in multi-asset investing.The team offers multi asset strategies, market intelligence, and customized solutions to its strategic partners. Managed assets include MainStay funds, strategic partnerships and customized solutions with third parties. Investment services include market insights, risk analysis, and financial education. Strategic partnerships are designed to meet bespoke investment objectives, such as income generation or inflation protection, through holistic solutions.

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