Financial markets have been rattled by the prospect of weaker growth. The key questions for investors are:
- Is a rate cut too little, too late to stave off a downturn?
- Has market psychology turned and bad news is now bad news?
A recession on the horizon?
August 03, 2024 at 13:04 PM EDT
The
U.S. economy is showing signs of weakness. The Citigroup Economic
Surprise Index, which measures whether economic releases are beating or
missing expectations, has been trending down. In addition, Chair Powell
has more or less made it clear that a September rate cut is in the
works, as long as the inflation data stays low. The Fed doesn’t need any
further softening in the labour market to reduce interest rates. He
laid out the Fed’s reaction function this way at the post-FOMC press conference:If
we were to see…inflation moving down quickly, or more or less in line
with expectations, growth remains let's say reasonably strong and the
labour market remains consistent with its current condition, then I
would think that a rate cut could be on the table at the September
meeting. If inflation were to prove sticky and we were to see higher
readings from inflation, disappointing readings, we would weigh that
along with the other things.Moreover, the jobs market doesn’t need to cool any further for the Fed to cut:I
don't now think of the labour market in its current state as a likely
source of significant inflationary pressures. So, I would not like to
see material further cooling in the labour market.
Financial markets have been rattled by the prospect of weaker growth. The key questions for investors are:
Financial markets have been rattled by the prospect of weaker growth. The key questions for investors are:
