Even if the Fed cuts rates this summer, it may be too late to stop a recession


US Federal Reserve Chairman Jerome Powell testifies before the Standing Senate Committee on Banking, Housing and Urban Affairs at Capitol Hill, Washington, on February 26, 2019.

Jim Watson | AFP | Getty Images

Even if the Federal Reserve does what the market wants and lowers interest rates this summer, the situation may be too advanced, according to Morgan Stanley.

"Fed cuts could come too late," Morgan Stanley equity strategist Michael Wilson said on Monday. "The Fed could cut spending in July but it will not stop the slowdown / recession."

The economy is already facing "very real macro risks", including data on weak employment, low inflation and growing trade tensions, Wilson said.

The market is expecting a rate cut from the Fed by July due to lower bond yields, stock market volatility and some signs of weakness. On Friday, the May payroll was well below expectations and the markets rallied in the hope that the Fed will begin to reduce its workforce as early as July.

In parallel with "the fall in the inflation rate and the inability to reach its 2% target" and the trade tensions that are weighing on business confidence, the Fed's rate cuts will not end a weakening of the economy, Wilson said.

Morgan Stanley has changed its outlook for global growth into "stagnation" until the end of the year instead of a "continuous recovery".

Investors should remain on the defensive despite a more accommodating Federal Reserve, Wilson said.

"The enthusiasm of investors for the idea of ​​an easier Fed policy is understandable," said Wilson. "However, if the Fed worried about entering a real unemployment cycle, we should not buy such a reduction until the employment situation is clarified." We believe that Friday's rally should be eased and investors continue to deflate the portfolios defensively. "

Wilson said it was necessary to "keep a cautious eye on expensive growth stocks, which are now more likely to miss profit estimates because of these very real macroeconomic risks."

– with CNBC report Michael Bloom


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