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Shrewd Investors Must Switch to 'Safety First' Mode

Shrewd Investors Must Switch to 'Safety First' Mode

By    |   Thursday, 20 June 2019 01:43 PM

The Fed did open the door to “easing” by stating it “would act as appropriate to sustain the expansion” in case and above all the “trade tensions” would damage growth.

The Federal Open Market Committee’s (FOMC) statement that was released yesterday reads: “The Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent … The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective”.

The word “patient” that the FOMC added in its statement of January 30 was not repeated because “uncertainties have increased”.

The FOMC statement of January 30 read: “The Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate.”

All this is important for investors as yesterday’s FOMC statement puts the Fed back into an unambiguous “data-dependent” mode that should make it relatively less complicated for the Fed when it’s convinced that it’s appropriate to lower the Fed funds rate.

Looking the dot-plot scenarios as shown in the “Economic projections” of the Fed that come with the FOMC statement one can see that the balance between the FOMC voters who consider easing and those who don’t, is narrow, which means that, as Fed Chair Jerome Powell during his press conference said: “Many participants now see the case for somewhat more accommodative policy has strengthened”.

The big question do is “where do we go from here?”

It could also be helpful taking note that the economic projections of the Federal Reserve Board members and the Federal Reserve Bank presidents themselves now estimate the “median” core PCE inflation rate to be at 1.8 percent this year, 1.9 percent in 2020 and 2.0 percent in 2021, which by itself wouldn’t be a reason to cut the Fed funds rate as the numbers remain within the so-called Fed’s symmetric 2 percent area.

All that said, the fed funds futures are now pricing in a 100 percent probability of a July 31 Fed rate cut while a 50 basis points cut is gaining traction.

All that said, there is a lot of data that will be released between now and the next FOMC meeting that will take place on July 30 – 31. To just mention a few, we’ll have on June 28 Personal Consumption Expenditures Price Index or CPE; on July 5 the so-called “Friday” June employment report where it’s important to keep in mind that a job report that comes in below 100K or unemployment rising that this would strengthen the case for the Fed to lower the Fed funds rate at the end of the month; on July 11 the consumer price index or CPI data; on July 12 the producer price index or PPI data; on July 26 the “advance” estimate of GDP for the second quarter, etc.

Besides all that we’ll have at the end of next week at the G20 summit in Osaka, Japan where President Donald Trump and Chinese President Xi Jinping will meet for “talks” but not for explicit trade negotiations. What will come out from that meeting remains an open question.

As an investor, I would prefer, for the time being at least, to remain extremely cautious and stay in a “liquid and safety first” mode.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Shrewd Investors Must Switch to ‘Safety First’ Mode
investors, safety, first, fed, rates, trump
Thursday, 20 June 2019 01:43 PM
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