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Should investors prepare for a "shock and awe" campaign from the Fed?



Investors cheered the Federal Reserve Jerome Powell as he reinforced the market's belief that the central bank would cut interest rates in July and continue to ease policy further in the second half, during two days of recent testimony before the congress [19659002] The news this week sent Dow Jones Industrial Average

DJIA, + 0.90%

S & P 500 indexes

SPX, + 0.46%

and the Nasdaq Composite Index

COMP, + 0.59%

to new heights but stronger than expected US inflation data and an increase in government bond yields over the last couple of days, market participants have been preparing for a number of Fed policy outcomes during the coming months.

The opportunities include a single 25 basis point cut in the federal exchange rate for the year at the next policy meeting in July, as well as a rare reduction of 50 basis points later in the month kicking off several rounds of relief before the end of the year.

"I find it hard to figure out why they are planning to cut," said Mark Stoeckle, CEO and senior portfolio manager at Adams Funds to MarketWatch, adding that his talks with management have left them "cautiously optimistic" about the economy. path as benchmark indices hit full-time height. This is not the traditional environment one expects to trigger interest rate cuts.

Michael O & # 39; Rourke, Marketing Director at JonesTrading, went so far as to call Powell's testimony "surreal" in a recent note to clients. "Unemployment is below Fed's maximum employment target, prices are as stable as they have ever been in the country's history, and the return on a 30-year dividend is 50 basis points all the time low," he wrote. and claims that the Fed clearly achieves its maximum unemployment mandate in the context of price stability.

Read : An economy gone wrong? Fed should cut interest rates despite record lows, low unemployment

Others say a reduction in such an environment is not as unusual as one would think. Ryan Detrick, senior marketing director at LPL Financial pointed out Twitter that the Fed has reduced the rate 17 times when the S & P 500 was within 2% of full-time cruises, with a decrease in 1996 when it was literally at record highs.

In fact, the late 1990s is a popular reference point for many analysts, with 1998 being a particular comparative comparison. So, as of today, the US economy began to feel the effect of a major economic downturn in Asia, which was then driven by the Asian financial crisis and culminated in the collapse of the Long Term Capital Management Security Fund.

The crisis in 1998 led to falling consumer confidence and tight economic conditions. Following new equity markets in July 1998, the shares increased above 18%. The Fed decided to cut prices three times, even though the job market was very strong and GDP grew by 5.1% and 6.6% respectively in the third and fourth quarters, respectively.

See also: Here's how many points a US & China trade agreement is worth for the S & P 500, according to JP Morgan's top strategist

The Cuts helped the stock market a quick turnaround, and stocks continued to paint higher for about two years to 2000 dot-com bubble breaks, which gives way to a multi-year bear market.

There is another belief among investors that the Fed can choose an unusual 50 base point cut at its next meeting ending July 31, with the Fed funds as futures markets placing a 23.5% chance of such a Friday move up from just 5.1% chance on July 5, according to the CME Group.

Historically, the Fed has wanted shock and awe as they ease, said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management said in an int erview. "They have been trying to exceed expectations when they ease" to maximize the impact on financial conditions and investor confidence. "

" The case for a 50 base point cut is in line with academic research that says the closer you are to the neutral rate and the lower the zero, the sooner you should act and the bigger the move, "Frances Donald, chief economist at Manulife Investment Management MarketWatch

At the same time, public statements by Fed officials like Atlanta Fed President Raphael Bostic and Richmond Fed President Thomas Barkin, both non-voting members of the Fed's interest rate committee, reminded investors that it is a minority of the Fed officials who don't think the economy needs another reduction this year. "A 50 basis point cut would require a significantly more stupid outlook from the committee. It doesn't seem to be politically unlikely within the four walls, Donald says.

The coming week will give investors an overview of new data to analyze that will surely feel in Federal Reserve's thinking. On Tuesday, US retail sales figures for June will be released, along with data on price inflation for the import price, industrial output, and business inventory.

On Wednesday, the Ministry of Commerce will issue estimates for a new home start and building permit for June. Thursday will have weekly unemployed claims and the conference's board of directors for leading economic indicators and Friday will give a new reading of the University of Michigan's consumer sentiment index.

Second quarter earnings season will also be launched in severe next week with Citigroup Inc .


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