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Barron's: Fed Rate Cuts Alone Can't Prevent Recession

Barron's: Fed Rate Cuts Alone Can't Prevent Recession
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By    |   Monday, 07 October 2019 08:24 AM

Savvy investors should realize that interest-rate cuts by the Federal Reserve can’t single-handedly save the U.S. economy from a recession.

Barron’s explained that two forces are at work that are jolting the economy. Those forces are the Fed, whose domain is interest rates (or monetary policy) and fiscal policy (or public spending), which is controlled by the federal government.

“Investors need to watch Washington as closely as they watch the central bankers,” Barron’s warned.

Fed officials were divided about the September rate cut, and approved the second rate reduction this year with a 7-3 vote. The Fed's target rate is now at a range of 1.75% to 2.00%.

Policymakers are likely to remain split after reviewing mixed economic data this week. Two reports, including one showing a contraction in factory activity and another pointing to a slowdown in services sector growth, raised concerns that global trade tensions and geopolitical risks were starting to weigh down the U.S. economy.

Barron’s explained that President Donald Trump’s U.S.-China trade war “has become a fiscal drag” on the economy.

The Trump administration argues it’s trying to win better terms for U.S. businesses, but the impact of higher tariffs shows up various manufacturing metrics, Barron’s explained.

“Beginning in the fall of 2018, it had become clear that global trade disputes were adversely affecting manufacturing,” said FedEx CEO Fred Smith on the company’s fiscal-first-quarter call. FedEx (FDX) reports results earlier than most, making them a bellwether for business conditions.

“Global trade remains the most significant issue, as demonstrated by the contraction in new export orders that began in July 2019,” said Timothy Fiore, chair of the Institute for Supply Management, or ISM, which surveys 800 business across 18 industries to derive the PMI figure.

Stocks tend to rise in the fourth quarter, according to Barron’s calculations, when investors start looking at the year ahead. “Recessions are rare events,” Barry Bannister, head of institutional equity strategy at Stifel, told Barron’s. It’s more likely than not the economy will be growing when investors trade 2019 earnings estimates for 2020 numbers.

“This year, to keep stocks afloat, lower rates are needed, but so is action on the fiscal front, such as infrastructure spending. But a bipartisan package to improve bridges and tunnel may be too much to ask for. Investors will settle for a trade deal,” Barron’s proclaimed.

Meanwhile, Atlanta Federal Reserve Bank President Raphael Bostic said on Friday he does not think the U.S. economy is heading into a recession and that stimulus from the Fed should help overcome "bumps" in the road to prolong the expansion.

Fed officials are assessing the downside risks of trade disputes and of geopolitical tensions to determine if the U.S. economy is headed for a "soft landing" or a "steep decline," Bostic said, according to Reuters.

"That’s something we’re still wrestling with and trying to keep our finger on so that we don’t miss something," he said during a moderated discussion at Tulane University in New Orleans.

Prolonged trade tensions with China are causing some businesses to sit "on the sidelines" and have the potential to affect consumers, he said. Still, he projects that the economy will grow above-trend in 2019, lifted by a tight labor market with an unemployment rate at 3.5%.

"There are lots of reasons to be optimistic about this economy," Bostic said. "But also we need to recognize that there's a lot of uncertainty out there."

His message reflected the uncertainty likely to hang over U.S. policymakers as they head into their October meeting. Bostic does not have a vote in determining monetary policy but he will become a voting member in 2021.

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Savvy investors should realize that interest-rate cuts by the Federal Reserve can’t single-handedly save the U.S. economy from a recession.
fed, rate, cuts, recession
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2019-24-07
Monday, 07 October 2019 08:24 AM
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