Podcast Intro: 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.
Jim Barnes: Very happy and excited to uh, to be back again with you today. And once again, we will be, uh, discussing, uh, whether transpired earlier in regards to the Federal Open Market Committee meeting. The Federal Reserve meeting. The last time we spoke was back in June and we know at that time Federal Reserve did not make any adjustments in regards to their interest rate policy. They had left the federal funds target range unchanged by a two and a quarter to two and a half percent, but they left the door open for potential rate cut. I, one of the future meetings. So up between then and now there has been, there’s a lot of anticipation and expectations for what the Federal Reserve might do in regards to adjusting interest rates and not just what they would do at today’s meeting, but to see if possibly the Fed might give some insight as to what fed policy might look like for the remainder of 2019 so again, there was just a lot of anticipation for it today and a and a lot of interesting developments that took place.
Jim Barnes: I guess just to start. So the Federal Reserve ended up cutting interest rates by 25 basis points now 25 basis point rate cuts. So as I said before, it was between two and a quarter or two and a half percent. So now this brings the rains down to two about 2% to two-and-a-quarter. And that was highly expected to where some individuals out there that thought that maybe the Fed might be a little more aggressive with their rate cuts, possibly dropping it by 50 basis points. But at the end of the day, there was a 25 basis point rate cut. And what’s interesting there was actually a two dissenters. So what that means is that you have a, a number of members that participate in these committee meetings and each member has a vote and typically everybody voted for a rate cut with the exception of two individuals who had stated that they didn’t feel that the US economy at this point was in need of any additional monetary policy stimulus.
Jim Barnes: So they thought that interest rates should have just stayed where they were at two and a quarter, the two and a half percent, but that’s key. So there were two dissenters. The other thing to note, the Federal Reserve said that they will not be shrinking their balance sheet come August time. That was somewhat anticipated, but it was, it was supposed to happen in September. So that means that there was a lot of focus on the Fed’s balance sheet, which right now is about three point 8 trillion. Remember that was all part of when they were doing their quantitative easing and the market was anticipating and see exactly how big the balance sheet was going to be this time around. And so they’ve decided on cutting them off at $3.8 trillion. And that was kind of announced behind the scenes. So that was the announcement that came out at two o’clock.
Jim Barnes: So we know now that rates drop 25 basis points. But now that the Fed chairman, I came out and he speaks to the, to the press, and that happened that, um, at two 30 today. Now this piece is very important to me because the market’s tight. Anticipate, while we know 25 basis point cuts of now it’s out there in the open, but what’s the Fed going to do going forward that it said its next meeting. So the remainder of 2019 and what the Fed said is that basically their, their overall outlook for the U.S. economy continues to be very favorable. And a Jay Powell, continue to note a very strong labor market, a healthy labor market. There was a good uh, attributes within the, uh, within the consumer area. Also very positive inflation is kind of a weak spot. And that was one area of concern, part of the reason why the Fed cut rates today.
Jim Barnes: But overall, they said the overall look for the U.S. economy they still think is going to grow a little bit north of 2%. So a very, very optimistic and positive outlook. But what he did go on to say them is that there are certain risks that they’re, that they’re concerned about and they’re looking at very, very closely. Although their base case for the economy is do very well, he did bring up, uh, you know, a lot of the, the trade concerns and a trade discussions that have been, uh, going on. He talked about just weak economic growth that’s been happening outside the U.S. And he also talked about just a low inflationary environment here in the idea that it’s been very typical to get inflation back towards that of that 2% mark on a consistent basis. And because of those various risk factors, they felt the need that today they had to provide somewhat of I what they refer to as an insurance cut to try to keep this economic expansion going forward.
Jim Barnes: What does that mean now for monetary policy going down the road? They’re still in wait and see mode. They have to see how the economic data continues to come in. Is it supportive of, of economic growth or some of these risk factors that I just noted? Are they starting to have a, a real negative impact on our economy here? Um, because if that were the case and then there’s a highly, highly good chance that another rate cut, it would certainly follow this one here. But it’s something we have to pay attention. We don’t really know. We don’t know how the economy is going to, is going to shake out. And in listening to Jay Powell, he was speaking, he was trying to make it clear that at this point they really don’t know what’s going to happen just because they don’t know the future. But as data starts to come in, they’ll get a better idea, a better feel for what economic growth is going to look like for this year and into 2020 and based on that, they will go ahead and adjust monetary policy accordingly.
Jim Barnes: The market investors, they didn’t like the comments or maybe the, the wording that had been used within his discussion. Jay Powell had noted that, you know, look at this as somewhat of a, of a mid-cycle interest rate cut and a in the market kind of interpret that to me. Well maybe this is the only one and another one isn’t coming. And so the Federal Reserve is taking a less, a less of a stance. And what you saw happening in, uh, in the financial markets, you saw equity selloff across the board in fact that the S&P 500, the Nasdaq, the Dow Jones, all of those various indices, fell on a day by little north of 1%. And when I look at that at the U.S. Treasury markets, so I want to get an idea of what bond yields did. Short term, you’ll take jumped up at the same time where you’re longer and yields a drop.
Jim Barnes: So you had somewhat of an of a flatter overall yield curve. Um, at the end of the day. And then the, at the most telling thing to get an idea of what investors are thinking. Now when I look at federal fund a futures markets where, and that’s where investors kind of, they placed their bets to, to what they think is going to happen. And with the, the federal funds target range going forward, they actually, they dialed back their expectations for, for re cuts for the remainder of the year. Whereas they had, they had implied they had expected two more rate cuts for 2019. Now they’re assuming that that we just have a one more to go. And that’s, that’s more consistent with our views here at, at, at Bryn Mawr Trust. We’ve always been supportive of what the economy looks like today. A lot of the underlying, uh, strength, the underlying fundamentals of economic growth seem to be a, it seemed to be quite strong.
Jim Barnes: And we continue to always go back to the consumer and the labor markets as positives. And now the interest rates 25 basis points lower. That’s, that just provides some, some more fuel for core stability and in the U.S. Economy. And, and we’re cognizant of some of these risks. Do Chairman Jay Powell had mentioned that are out there. Well, we just think that the economy is so robust at this point that, you know, maybe another rate cut to provide some more insurance and to, you know, hopefully ensure that this economic expansion continues to move along. I think it’s very important to it to just note that, um, that the Federal Reserve is very sensitive to this expansion. They want to keep it going. They’ve acknowledged that when they look at the labor market, you know, there’s some individuals, there are many people there that have not been able to participate in this expansion.
Jim Barnes: They finally are, uh, whether that means they’re defining jobs or if they’re getting, um, a wage increase. It’s just seemed as if it’s hitting a wider span of individuals. So it’s important for the Federal Reserve in their view to, to do what they can to keep this expansion going. And when you have such a low inflationary environment, it gives them a, it gives them the cover to uh, to do so. So again, just as a quick recap, as expected, the Federal Reserve dropped interest rates today by 25 basis points and we do expect maybe another 25 basis points for the rest of this year, which now seems to be more consistent in line with what the overall market is, uh, is anticipating. But just keep in mind that all this is going to be based on as incoming data comes in both domestically and internationally and that the ultimately will end up, um, shaping our views. With that being said, it’s always great to talk to you and give you an update. Once again, this is Jim Barnes, director of fixed income. If you have any questions, please feel free to visit us at our website, bmt.com. Thank you very much.
Podcast Closing: This has been a production of Bryn Mawr Trust. Copyright 2019 visit us online at bmt.com/wealth. The expressed herein are those of Bryn Mawr Trust as of the date recorded and are subject to change without notice. Guest opinions are their own and may differ from those of Bryn Mawr Trust and its affiliates and subsidiaries. This podcast is for informational purposes only and should not be construed as a recommendation for any product or service. BMT wealth management provides products and services through Bryn Mawr Bank Corporation and its various affiliates and subsidiaries, which do not provide legal, tax, or accounting advice. Please consult your legal tax or accounting advisors to determine how this information may apply to your own situation. Investments and insurance products are not. Bank deposits, are not FDIC insured, are not backed by any bank or government guarantee and may lose value. Past performance is no guarantee of future results. Insurance products not available in all states.