Welcome to the Bryn Mawr Trust Wealth Management podcast, providing commentary on what’s moving the financial markets, financial planning, and other timely business and monetary topics. Please welcome today’s host, Jim Barnes, director of fixed income at BMT Wealth Management.
Hi this is Jim Barnes, director of fixed income here at Bryn Mawr Trust. Very happy and excited to be back again with you today. We’re going to go ahead and talk about today’s Federal Reserve meeting that took place yesterday, and the overall outcome was today. And today was a great meeting, simply because there was so much anticipation out there from investors. Everybody was trying to anticipate what the Federal Reserve’s next move was going to be for interest rates. There was little expectations for any rate cuts, but everybody was really focused in on some of the commentary, both written as well as verbally, in Chairman Powell’s conversation after the FOMC meeting through the press conference. And so we’re looking forward to it, and so let’s just go ahead and jump right into it.
The first I want to do very quickly is set the stage as to why there was so much hype and so much expectations for today’s meeting. And that is [INAUDIBLE] Because earlier in the year, it just seemed as if the Fed was mostly focused in on global economic growth, and weakening global economic growth, as well as some ongoing trade discussions, mostly with China and the US. And they were focused in to see if anything in those two areas would somehow spill over to the US economy. Because the US economy has been doing pretty well. We’ve been pretty stable. We should be, year after year, after economic growth. We had a really strong 2018. But the Fed was still somewhat concerned to see if some of these outside factors might spill over into the US and knock us off course. So earlier on in the year, that’s pretty much where the Fed’s focus was.
But then if you recall, the last time that I was here speaking to you, I talked about the Fed, and their focus had shifted to just overall low inflation. And the market was anticipating and trying to monitor to see if inflation was low enough to have the Fed act on interest rates going forward to see if inflation would be low enough to have to drop interest rates. And if you recall, Federal Reserve Chairman Powell said well, we think a lot of the impact that’s keeping inflation low is somewhat transitory, meaning that even though the levels are very low today, we think that some of those factors that are cushioning and providing and weighing on low inflation will eventually work its way in and out of the system, and we should see inflation bounce back up to 2%.
Since that meeting, so over the last six weeks, things have shifted once again, because the market has become very, very pessimistic, and they’ve been anticipating the Federal Reserve to step in there and start dropping interest rates. Just because of that pessimism, they think that economic growth is going to stall. And the investors’ concerns are tied around going back to those same issues– global economic growth and just overall trade discussions, and they just think that things have been deteriorating enough that at some point it’s not only going to filter into poor economic growth– US economic growth– but it’s enough to where the Federal Reserve is going to have to jump on in there and do something just to prevent that from happening.
So with that being said, now we get to today’s meeting. And very quickly I’ll go over the overall outcomes. So the first main outcome, as expected, the Federal Reserve– they didn’t do anything to interest rates. So that target range, which right now is about between a 2.25% and 2.5%. They left that alone, and that was expected. Investors were anticipating that. We were anticipating that. So no changes there.
The second thing that’s worth paying attention to is, after the meeting, the Federal Reserve– they’ll issue a statement out there to the public. They will refer to it as the FOMC statement. And they’ll give a quick synopsis of some rationale to some of their decision making over the past two days. And within their comments, it was somewhat noteworthy that you could tell that they were becoming a little more pessimistic as well in some of their comments.
And I’ll just read very quickly one of the lines here they have in their statement. They’d noted that– and just reading right from the statement, the committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the committee symmetric 2% objective as the most likely outcomes. However, uncertainties about this outlook having increased in light of these uncertainties– and they’re referring to global growth as well as dry trading tensions– and they say, 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% objective.
So the key thing to note here– before they had referred within their statement– they had a word in there– patient– meaning that they would be very patient as data would come in before they would feel a need to pull the trigger– they took the word patient out of their statement, which leads you to believe that there is no more patience in a sense where if the economic data starts to deteriorate, they’re going to be ready to act and alter monetary policy accordingly. In other words, we get a more dovish stance and quite possibly adjust interest rates on the downside to keep this economic growth going.
Within all the members that vote for policy, all of them agreed let’s not let’s not cut rates today. Let’s see how things play out going forward, and we’ll use that as the basis to determine whether or not any changes need to be made with the exception– there was one individual– James Bullard– he had said he’d had enough. He said, you know what, I’m concerned with the economy right now. I think we need to cut, and so I’m in favor today of actually dropping interest rates. Now of course as I said, they did not, so he was a dissenter. He did not go along with the overall group.
The third thing I would note here is that every three months– every quarter– so they’ll do it in March, June, September and December– they have what they refer to as a summary of economic projections, where all the participants of the FOMC– they’ll give their outlook for economic growth, inflation, employment, and the federal funds target range for 2019, 2020, 2021. So basically what each individual does is they just provide their overall assessment of where they think these four areas are going to be at the end of each one of those years I just mentioned. And, as I said, they were somewhat positive. They think that the economy– they still have a positive view on economic growth. They have a positive view on the labor market. They still have some concerns on inflation being low which is OK. We always knew that existed.
But probably the biggest change here is that they are anticipating interest rates to be 50 basis points lower over the next 18 months. So that’s a pretty significant change from where we had left off the last time that the Fed held their meeting. So again, to say that again, the Fed thinks that over the next 18 months it’s very possible that they could be dropping interest rates by 50 basis points.
So it does seem somewhat counter-intuitive where if I look at their base case outlook for the economy, it’s pretty rosy. It really hasn’t changed all that much. They still feel pretty good about the US economy. They still feel pretty good about the labor market. But yet, at the same time, they’re calling for a potential 50 basis points worth of rate cuts over the next 18 months.
So we needed something to bridge those two differing almost discrepancies with each other, and that’s where Chairman Powell comes in. He had a press conference at the end of today’s meeting, and so he sits there and he answers a number of questions from the press. And as you would imagine, everybody picked up on this somewhat discrepancy– discrepancy between that the Fed feels as if the economy is in a good position, but at the same time they think that maybe the economy needs some rate cuts to continue to expand.
So the press asked him some questions along those lines. And the way Chair Powell– what his response was was very straightforward. He had said that we do think that if we look at the US economy today, and we look at the underlying strength and the sectors that drive economic growth, if we look at the consumer, some of the underlying fundamentals around the consumer everything still points to a very positive outlook. The problem, though, is simply that the risk to their forecast, the risk to what they think is going to happen to the economy going forward has changed quite a bit, and it’s changed in the negative side.
And what he’s referring to is that those ongoing trade discussions– and we see headline news on them all the time about sometimes they look like they’re going well and sometimes they don’t. And I think that as of late, that was just when we know that the discussions had broken down between President Trump and President Xi of China– the market took that as a very negative sign for trade going forward, and had a negative outlook for economic growth going forward. And then the other piece that the Fed had noted that there’s a lot of uncertainty around is that Chairman Powell had noted that some of the economic data globally, once again, has started to deteriorate. And so the Fed’s nervous that what happens outside the US, at some point, may have a negative impact on us here as well. So even though their base case– they still think the economy to the best guess to them should continue to perform well going forward, these risks are not only still outstanding, but they’ve grown in significance, and that’s what’s creating this potential for rate cuts over the next 18 months.
So where does that leave us. Well, probably the best way to answer that– when I look at the market’s reaction post fed today, US treasury yields dropped pretty significantly across the yield curve. The two-year US treasury note dropped about 11, 12 basis points, and it’s currently yielding 1.74%. That’s important to note. Your two-year treasury is going to be the most sensitive to Fed policy, just because of its short-term nature. What the reaction in the bond market’s telling us is that investors feel as if rate cuts are coming. And there’s really no other way to say it. I’m not predicting that it’s going to happen, but I’m simply stating that based on the bond market behavior today, they’re definitely anticipating rate cuts are on the near forefront.
On the equity side, we saw equity markets bounce back. They went into the meeting trading somewhat flat to negative, and then all the major US equity indices closed the day on the positive side and that’s where I I’m referring to the Dow Jones Industrial Average the Russell 2000 NASDAQ all of those S&P 500 all of those various equity indices all ended up on the positive, so it seemed as if the equity investors also like what they hear. And it’s probably very simply the fact that if the economy could continue to grow and get better and get stronger, and at the same time the Fed’s– they’re ready to adjust policy and provide more accommodative policy if need be, that’s overall a somewhat benign environment for the markets going forward.
So now, where does that leave us going forward? Well the Federal Reserve will next meet on July 31. That’s their next meeting. And so there are very high anticipation– high hopes– that the Federal Reserve will cut at that meeting. There’s a lot of important events still that we’re going to get from now until then that will factor into the Fed’s decision. And some of the things– just to point them out– the first thing I’d say is at the end of this month, President Trump and President Xi of China will be meeting at the G20 summit that will be held in Japan. That’ll be very important so that investors and the Fed, everybody can get a feel for how these trade discussions are developing going forward.
We’ll also have another labor market report. We’ll get that in the first week of July, and that will be for the month of June. So the Fed will be wanting to pay attention to see if the labor market is continuing to be as healthy and strong as it has been. And I would say another very important piece of data is that we’ll get second quarter gross GDP. That’ll come out towards the end of July. So we know that we grew 3% in 2018. We grew at 3% the first quarter of 2019, and now we’ll get another read in the second quarter for the second quarter of 2019. So we’ll see if our growth rates continue to be well north of 2%.
So I think all those different events will factor into the Fed’s decisions. I know investors will be paying attention to them. The Fed’s going to be paying attention to the outcome. And I certainly know that here at BMT, we’re going to be monitoring and paying very, very close attention to not just that data, but also other data that comes out as well.
I’m going to sign off here. Again, my name is Jim Barnes, director of fixed income. I look forward to catching up with you again over the next six weeks. In the meantime, if you have any questions, please visit us at our website BMT.com. Thank you very much.
This has been a production of Bryn Mawr Trust, copyright 2019. Visit us online at BMT.com/wealth.
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