The Fed removed its pledge to “act as appropriate”, indicating it may now take a pause to assesses whether its cuts so far have been enough to stabilize growth. Chairman Powell added that monetary policy is in “a good place” and likely to remain “appropriate.”
Fed still monitoring uncertainty
The Fed continued to highlight risks from overseas as well as elevated uncertainty. Policy is clearly not on a pre-set course and it likely wouldn’t shy away from further easing if data deteriorates.
Ultimately though, the Fed’s urgency for additional stimulus appears to have diminished given above-consensus economic data releases and signs of economic resilience since the first rate cut (Figure 1).
Figure 1: Economic data has impressed over the last three months1
Source: Bloomberg as of October 30, 2019.
The American consumer continues to drive GDP
Ahead of the meeting, the committee was likely heartened by the GDP report, which came in at 1.9% versus the expected 1.6%.
Alongside government expenditure, the standout once again was the domestic consumer, while business investment languished. This coincides with our recently published thought piece on the subject: Is it time to back the American consumer?, which details our thoughts on this trend.
Are we closer to the end than the beginning of the cutting cycle?
Given the continued strength of the consumer, we largely share the Fed’s cautious optimism and expect moderate, albeit slowing GDP growth over the next year.
While we would not rule out one more rate cut, in our view, we are nearer the end of this cutting cycle than the beginning. The Fed looks to be achieving its goal of “sustaining the expansion.” This underpins our expectation that long-term rates will loft moderately higher over the next year.
In itself, this has not created opportunities in credit markets – as corporate spreads are already largely pricing this in. In our view, a security selection strategy focusing on issuers that will likely benefit from consumption-led economic growth could help extract value from such a trend.
1The Citi Economic Surprise Index measures data surprises relative to market expectations. A positive reading means that data releases have been stronger than expected and a negative reading means that data releases have been worse than expected.
Please note: any forecasts or opinions expressed herein are Insight Investment's own as of October 31, 2019 and are subject to change without notice. This information may contain, include or is based upon forward-looking statements. Past performance is not indicative of future results.