Course Correction

| June 12, 2019
Share |

Bonds have increasingly signaled that Federal Reserve (Fed) policy may be too tight for an economy tied up in a drawn-out trade dispute.

As shown in the LPL Chart of the Day, “Bond Market Increasingly Pricing in Rate Cuts,” fed fund futures are now pricing in almost three rate cuts by the end of 2019.

The 2-year Treasury yield, another gauge of policy expectations, has fallen to about 60 basis points (0.60%) below the upper bound fed funds rate.

On balance, economic data still appear sound. However, there have been signs that growth could slow over the coming quarters.

“Trade uncertainty may be the primary risk to an otherwise solid economic outlook,” said LPL Research Chief Investment Strategist John Lynch. “Eventually, the Fed may have to intervene by lowering interest rates, which investors should view as a course correction rather than a decision to get ahead of an imminent recession.”

A course correction, or rate cut after policy tightening, has been more typical than what recent history shows. In the last economic cycle, the Fed’s first course correction didn’t occur until about four months before the recession started in January 2008. In every other expansion since 1970, however, the Fed has made at least one course correction in the first half of the cycle.

Wall Street’s favorite analogy for this environment is the 1995 “insurance cut,” when the Fed cut rates by 25 basis points (0.25%) twice that year amid fears of overtightening. At that point, the expansion was four years old, and growth was moderating (but still solid). After the Fed’s first cut in July 1995, the expansion lasted almost six years longer. Six more years for this expansion would be a surprise, but we see several similarities now to the environment that existed during the 1995 rate adjustment.

For more of our thoughts on Fed policy, check out this week’s Weekly Economic Commentary.

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit

Member FINRA /SIPC

For Public Use | Tracking # 1-862192 (Exp. 06/20)

Share |