Should the Federal Reserve have Cut Interest Rates by another 0.25%?
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 09/20/19. Rates and Economic Calendar Data from Bloomberg as of 09/20/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global capital markets took a break from a multi-week expansion, retreating moderately last week. In the U.S., the S&P 500 Index fell to a level of 2992, representing a loss of 0.49%, while the Russell Midcap Index fell 0.27% for the week. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, followed suit with a decline of 1.14%. On the international equities front, developed markets moved 0.35% lower, while emerging markets lost 0.45%. Finally, the 10 year U.S. Treasury yield continued to give-up ground, finishing out the week at just 1.74%.
Since the onset of the Federal Reserve’s (“Fed”) resumption of monetary easing, we’ve made our views very clear. We did not believe that the Fed was warranted in cutting interest rates 0.25% in July, nor do we believe that another 0.25% cut was necessary this past Wednesday. Many proponents of low-interest rates argue that the cut is absolutely necessary given the global context. The argument is underpinned by the fact that central banks around the globe have moved to lower short-term rates, subsequently depreciating their respective currencies, and increasing the relative value of the U.S. dollar. A strong U.S. dollar makes it more difficult for U.S. businesses to export goods, ultimately weighing on overall economic growth. This rationale is economically sound but disregards the most important consideration; the current economic well-being of the United States, which we believe to be quite strong considering the following.
• Consumer spending and retail sales reports continue to impress
• The unemployment rate is at a historically low level of 3.7% and companies continue to hire
• Gross Domestic Product (GDP) growth appears firmly planted slightly above the Federal Reserve’s long-term potential growth rate of 1.9%
• Inflation, one of the Fed’s key stated objectives, has steadily risen and Core CPI currently stands at 2.4% year-over-year
• Private sector wages are up 3.2% year-over-year
• 10-year Treasury yields are well below inflation, indicating that financial conditions are relatively easy and that interest rates are low enough where they stand today
The six bullet points above speak to an economy that is “Slowing but Growing”, with the operative word being growing. We, as Americans, need the Federal Reserve to stand as the lender of last resort in periods of economic turmoil, but they can only do so if they have available stimulus tools in their arsenal. Racing to join Japan and the European Union in negative interest rate territory will leave the Fed void of the ammunition they potentially may need to fight the next major economic crisis.
To say that we’re moving into uncharted territory is an understatement which is why we continue to encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within an appropriately diversified framework that is consistent with their objectives, time-frame, and tolerance for risk.
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MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
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ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
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LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
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DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.