Rates & Recession: What Happened?
Last Wednesday, The Fed lowered its target for the federal funds rate by a quarter percentage point, to a range of 1.75% to 2%.
This was the second cut in interest rates in seven weeks to support the economy in the face of concerning economic indicators, coming on the heels of the cash injection by the Fed in the face of the credit crunch in the repo market. More interesting than the widely anticipated rate cut was the lack of consensus amongst the Fed’s rate setting committee, mimicking the market uncertainty about whether or not the US is headed into a recession. Two members of the Federal Open Market Committee dissented from Wednesday's cut, preferring to leave rates unchanged. One member voted for a more aggressive cut of a half percentage point.
The biggest question on everyone’s mind is what’s next? Will the fed continue down the path of quantitative easing in the face of recessionary headwinds, and will quantitative easing continue to be an effective tool?
Many forecasters are anticipating additional rate cuts this year. But even with that extra push from the Fed, economic growth is expected to slow, possibly dipping below 2%. Manufacturers and business have put investments on hold — not because of the higher cost of borrowing, but due largely to lower demand thanks to slow overseas growth, the trade war, the growing concern about oil prices after last weekend’s attack in Saudi Arabia and the dwindling impact of the 2017 tax cuts.
With elections looming, there is pressure from the government to cut rates to zero or even lower, but economists are not convinced that given the factors noted above, quantitative easing will help the nation’s struggling factories. In fact, more and more market participants are looking at government spending and taxes as more effective tools to encourage private sector investment as opposed to interest rates, which continue to hover around historical lows.
Recent reports of an initial bilateral agreement with Japan and progress in negotiations with China give cause for optimism, but until there is a final trade deal, these are just talks and businesses will continue to “wait and see.” The much talked about temporary yield curve inversion had some believing in a more imminent recession than economists are predicting. In a nutshell, the state of the markets today and outlook for interest rates can be summed up in one word: Uncertain.
Let’s hope the next few weeks bring some clarity to provide impetus for additional investments by market participants.