Introduction: 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: Hi, my name is Jim Barnes, director of fixed income here once again to provide you an update with the federal reserves recent meeting earlier today. I’ll break this down into a few different components I’d want to talk to about what the Fed’s decisions actually was. I want to talk to you a little bit about the post press conference by a chairman Powell, what the overall market reaction was to what we saw today and then some overall general comments as to what we see here at, at BMT or a things developing as we approach the year end. But first, let me just start off by saying I’m offering a little bit of a, of a recap. So at the last FOMC meeting at back in July, we know that the Federal Reserve had dropped interest rates for the first time in roughly 10 years by a 25 basis points.
Jim Barnes: And at that time, the Federal Reserve had talked about how the underlying fundamentals of the U.S economy were very favorable and strong, but that risks to the U.S. Economic expansion had grown somewhat because of trade policy uncertainty, as well as global growth in general of being someone weak and how those two factors could possibly spill into the US economy here. But at the end of the day, they dropped to 25 basis points. So I think as we were heading into today’s meeting, there seemed to be pretty wide consensus of an additional 25 basis point rate cut. However, the market was in disagreement as to how monetary policy would play out, not just the remainder of this year, but to what 2020 would look like as well. So I’m just gonna get right to it and say that the Fed did not disappoint expectations from a market participants were realized and that the the Federal Reserve dropped that federal funds target range by 25 basis points.
Jim Barnes: It’s now current 1.75% to a to 2% some interesting things that came out of that meeting. However, there are voting members at today’s meeting, there were 10 so you have 10 individuals within the FOMC that kind of voiced their opinion to provide a vote of where they are, how they feel policy should evolve. Seven of those individuals, seven of those 10 all agreed that a rate cut today was warranted and made sense, I should say a 25 basis point cut assembly because there was three dissenters, one of those three to centers actually thought that 25 basis point cut today was not enough and he was actually looking for something a little more drastic in in the range of 50 basis points. And then you actually had, interestingly, you had two additional dissenters on top of that, but they didn’t see a need to cut rates at all.
Jim Barnes: And their position was that, you know, you look at the current economy here in the U.S. Everything’s going pretty well. There just isn’t a, a need today to make any adjustments and to kind of take that at ascension a step further at the meetings, there are, at least for today, there were, there were 10 votes. However, there were other participants that are within the FOMC and they all have used as to how they feel. A monetary policy is going to evolve. When I refer to monetary policy, I’m referring to that federal funds target range. Whether or not they should stay where it currently is right now, as I said before, 1.75 to 2%, whether it should be adjusted higher or lower and based on just the tally when looking at there are 17 individuals that all kind of speak their minds as to where they think policy should be in the, in, in the future.
Jim Barnes: This is extremely pointed to the kind of point out, there’s a lot of divergence as to what people’s views are, what these participants’ views or for policy going forward, you have seven individuals that actually think policy at the end of the year. We’ll actually be lower and lower start there. We’ll probably end up cutting rates. Again, you have five the individuals that feel that there’s probably no need for any additional cuts that what we have today. That’s, that’s enough to keep the expansion going. And you actually had five individuals who actually think that palsy rate could be a little bit higher by year end. And so that’s interesting and it’s a, it’s a big divergence and I think the way we have to look at this is that it seems to be you know, one or two sides here, those individuals that are looking for additional rate cuts, I think they all generally agree that the is on a financially sound footing today, but they are concerned with some of these risks as it relates to as I pointed out before with global growth slowing down and, and trade policy.
Jim Barnes: But because of those risks that are out there, they want to see some insurance cuts and that’s how they characterize it. That’s how they phrase it. They use the term insurance cuts to make sure that this expansion that as we know now is beyond 10 years continues to progress going forward. And then you have this other camp out there that says, well wait a minute. If the economy’s growing today and it looks pretty strong, we talk about the strong consumer we know that the housing sector, we, there is some good data out earlier today that we can see that some of these low, this, this lower interest rate environment today is starting to support other sectors that drive GDP. Why are we cutting? Why don’t we wait given how low interest rates are anyway, why don’t we wait to sign, start to, to emerge that indicate that the economy is slowing down and act then.
Jim Barnes: And the rationale there is because if you act too soon, the Fed might lose some of its ammo. And so those are the two competing views and we’ll have to see how that plays out going forward. I do want to note just a couple of things within a the the press conference and I thought it was very interesting that chairman Powell had brought up an interesting in a sense that there are key topics that have been out in the headline news recently when he was asked about the the yield curve and version. And again, just as a quick note here, Chairman Powell, he will respond to questions after the FOMC statement is released at two o’clock he’ll respond to report as questions and one of the questions had to do, you know, if they’re concerned with the yield curve inversion, we know that the yield curve in version has been getting a lot of attention and there is a lot of thoughts there that that could be a good predictor for four recessions.
Jim Barnes: And he basically said, well, we have some people might not sound too surprising, mixed views on within the FOMC as some feel that it does have some strong explanatory value to a recessions. Whereas the other side, it was basically taking the point, well there’s so many other factors that are influencing bond yields today that aren’t necessarily recession indicators. And it seemed as if chairman Powell was in that bladder camp because he did point to negative global bond yields as part of the influence too. You know, why investors might be shifting over here that we’d be putting additional downward pressure on our, on our yields more so than just the, the traditional place near impact. And then on that same note with negative yields, he also addressed one of the questions which I thought was really interesting is whether or not the Fed would if they would entertain negative policy rates as they, as they have.
Jim Barnes: They’re over in in Europe and Japan and eh, he said that, you know, they had talked about that back in 2008 when the financial crisis was going on and looking in their toolkit to see what tools they had at their disposal to try to get economic growth going again. And he said that the, even though it was discussed, that they favored more of a constant and consistent and over and over again forward guidance. As well as it just the quantitative easing and just buying assets and mortgage backs and U.S. Treasuries as at that point, probably a more pronounced impact to long-term yields. But we did think it was interesting the question did come up on negative yields. We know that’s been on investor’s minds for, for a while now and, and that’s so, it’s interesting to know that the Fed had talked about that, but going as far as far back as 2008 and and I should end that topic by saying he ended it, Powell ended it by saying that he doesn’t see a need at this point for a, for negative rates to to flow into the U.S. And so probably more to come on that later on.
Jim Barnes: But it was just an interesting two key topics that are, that have been out there in a, in the headline news that Powell actually addressed. So let’s just turn right now to a, this third point. And that’s that the overall market reaction, there was a lot of volatility in both the equity and the fixed income side. And when I look to see what happened within that specifically when inequities, the market was already lower when the FOMC when the announcement was released and it actually, it started going even lower, the S&P dropped, maybe 23, 24, 25 points somewhere in a, in that range. But it actually was able to regroup those losses and, and end to the end of the day and positive territory by a modest one point. But the key takeaway there was it ended in positive territory. And then in fixed income, there were still, there was some volatility there, but it was more one sided where you had the market was pretty strong yet prices up and yields low.
Jim Barnes: As we, entered to today’s market activity, but once the Fed announcements was released at two o’clock, you saw a little bit of a sell off that just gained some traction throughout the remaining part of the day. So a quick takeaway there is that the yield curve ended a little flatter than where we had started. And to put that in perspective, the two year yield increased about 10 basis points. Whereas the 10 year yield increased roughly a five so you can see there just a the difference there is five basis points or so contributing to a flatter yield curve. So overall, so what’s our assessment of today’s announcements, putting it all together. We do think there are some very compelling reasons to why the U.S economy can continue to grow not just in 2019 but in 2020 as well. There’s just so many good things that are working partly that are contributing to just overall the consumer spending.
Jim Barnes: And we’ve talked about this before, when you think about labor markets, low inflation, low inflation in a sense with consumer prices, but you are starting to see some wage inflation out there north of 3%. Those are all big positives to a consumer driven US economy. We have noted that the past though, we know that manufacturing is a little weak here, but just keep in mind the manufacturing makes up a very, very small piece of the U.S. Economy. So overall we, we see economic growth here as a positive. As I noted earlier, it was nice to see the housing sector starting to show more signs of a rebound because of those low mortgage rates. But you know, we have to pay close attention to trade policy and to what’s happening overseas. It’s the, you know, in an environment where everything is global. I mean there’s so much integration between the U.S. and and other developed in emerging markets around the globe that if you do have downturns that drag on for a period of time, eventually they should start to filter into it to some degree within our, within our economic data here, we haven’t seen it to a great extent, but something that we’re just going to have to monitor. And then on the trade policy front, you know we have that some recent positive headline, but the the trade situation is very, very complex in that it’s probably a little too optimistic to say that a deal is going to be right around the corner. There’s just too many moving parts to this, but we think given that we have an election year coming up that we could have some stability on that front some way where I even though it, it might remain an outstanding issue, it might not factor into business spending and investments to such a negative degree as the connotations today are leading us to believe. So. With that being said, this was a great once again to be able to give you a quick recap of today’s events and my name is Jim Barnes, director of fixed income. As always, if you have any questions, please go ahead and visit BMT dot com thank you very much.
Jim Barnes: This has been a production of Bryn Mawr Trust. Copyright 2019. Visit us online at bmt.com slash wealth.
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