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(MENAFN – Khaleej Times) US Federal Reserve Chairman Jerome Powell will have to be very aggressive not to disrupt the stock market this week, even as the central bank meets expectations and lowers interest rates. Interest for the first time in more than ten years.
Investors are betting that the Fed will most likely reduce the federal funds rate by 25 basis points, in the range of 2% to 2.25% by the end of its two-day meeting on July 31st. The cycle of easing rates since September 2007, when the financial crisis began to intensify, or a more limited surge of cuts in the "insurance" sector, is far from over. To be clear.
Whatever the case may be, the S & P 500 has always risen in the months following the start of Fed compression cycles, even the pair of mini-cycles in the mid-1990s.
But with the benchmark already up 20% since the beginning of the year partly because of rate-cutting expectations, a quarter-point reduction might not be enough to extend or even maintain the gains of 2019. Instead, the market will look at Powell's view of the economy and show his appetite for further cuts.
"You will see a lot of volatility between the announcement and the end of the press conference because investors will badyze every word," said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago.
Many are looking for Powell to report more rate cuts.
For example, if Powell says its next steps will be driven by numbers, it may suggest an open mind to future reductions, said JJ Kinahan, chief market strategist at TD Ameritrade.
But if the Fed chief also comments on progress in the economy, it could erode hopes.
"We are limited on the positive side, but he could say a lot of things that are not well received, what he says and how it is interpreted could be what disappoints," said Kinahan. "Every word has to be perfect, it's a difficult line to walk."
The stronger than expected reading of the US gross domestic product in the second quarter on Friday will certainly reinforce the argument that a complete easing cycle may not be warranted yet. The way Powell characterizes the Fed's actions in this context is the key.
Quincy Krosby, chief markets strategist at Prudential Financial in Newark, NJ, said investors would seek Powell's "trade-offs" again in trade and what he's doing. everything possible to preserve growth.
Nevertheless, "after the meeting, you may find that the market is catching on and consolidating while waiting for the next catalyst," said Krosby, who sees China-China trade agreement as the next big catalyst.
Although the short-term reaction is moderate this week, history shows a positive long-term trend for equities after the start of a rate reduction cycle.
Since 1954, the S & P 500 has increased an average of 14% in the 12 months since the start of the Fed's rate-cutting cycle, according to Audrey Kaplan, Head of Equity Strategy. at the Wells Fargo Investment Institute.
The S & P dropped in the 12 months following the start of only three of the 16 cycles of easing. According to Kaplan, at the beginning of the economic cycle, the economy was already on the brink of a recession in two of these periods (2001 and 2007).
But Kaplan does not see a recession on the horizon this time around. Instead, she hopes for an economic boost through rate reduction or signals of further cuts.
"The rates are very low this cycle, it's very different from other cycles, but the low and declining rates might be good for the expansion of the business cycle," she said.
Interest rate traders are betting that a rate cut of at least 25 basis points is a certainty, according to Fedwatch's CME group. They estimated at 19.4% the probability of a 50 basis point cut, which would bring the target range of the Fed to 1.75% to 2%.
While some investors would like a cut of 50 basis points on Wednesday, others fear that the Fed will reduce two notches if it sees something more worrying in the economy.
"The market does not like surprises.It could initially recover, but with such a low probability, the longer-term question would be:" What do you see we do not see? " ", Said the Kinahan of Ameritrade.
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