This week features the release of the latest FOMC meeting minutes as well as testimony before Congress by Fed Chief Jerome Powell. The minutes will be released on Wednesday, while Powell’s remarks will begin Wednesday and conclude Thursday. The latest meeting minutes will likely take a back seat to Powell’s comments, and investors are hoping that the Fed Chief will provide some clarity about the central bank’s plans regarding rates going forward.
Expectations for an interest rate cut have been dialed back in recent days following last week’s non-farm payrolls data. The jobs report showed strong employment, although the three-month rolling average has declined. The 224,000 jobs added for June is considered a very respectable figure, and while the unemployment rate ticked slightly higher to 3.7 percent, the uptick may be due to larger participation.
There had been an increasing amount of talk about the Fed perhaps cutting rates by 50-basis points at the next meeting.
Those expectations have essentially been cut to less than five percent, although markets still anticipate a 25-basis point cut in July.
The Fed is going to cut. Investors likely want to more about the timing of cuts and just how aggressive the Fed may be regarding policy.
In the background of a slowing U.S. economy, numerous geopolitical risks could send markets lower and volatility higher. The ongoing U.S./China trade war, which has already had a measurable effect on the economies of both countries, appears set to continue. Increasing tensions with Iran could potentially cause a global oil shock and North Korean nuclear ambitions are still a cause for concern.
The U.S. economic expansion is getting longer in the tooth by the day, and recent record highs in stocks could potentially represent long-term highs that may not be reached again for years, even decades. The Fed will do what it can to combat the slowdown.The problem is, there is only so much the central bank can do.
Unlike the financial crisis of 2008, the Fed is currently working with a Fed Funds rate that is only 2.25% to 2.50%.
Cutting rates from current levels may not have the same effect as when the central bank started cutting rates aggressively from 5.25% to 5.50%. The central bank could potentially be forced to initiate a fresh round of QE in order to fight the next major global recession. Although the money printing may keep stocks afloat, at least for a while, such a move could have a significant effect on the dollar. In addition to a weaker dollar, the eventual unwinding of such a move could send stock prices plummeting. At some point, the levee will break, and stock investors could potentially see declines of 30, 40, even 50 percent or more.
Against the backdrop of an aging economic expansion, slowing global economy, risk of recession and numerous geopolitical risks, now is the time to add diversity with alternative asset classes. With its potential to hedge against inflation and a weaker dollar and unlimited upside price potential, there may be no better asset class to look to than gold.
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Tags: central bank, economic expansion, fed funds rate, job report, meeting minutes, next recession, rate cut