Latest / Markets with Megan: A Quick Financial Markets Update / Fed Pivot, Inflation, and the Risk of Recession | Episode 164 | 08-26-2024

Transcript

Fed Pivot, Inflation, and the Risk of Recession | Episode 164 | 08-26-2024 · Markets with Megan: A Quick Financial Markets Update

• 0:01
  Megan Horneman: Well, on Friday last week, we finally got that Fed pivot that everyone's been waiting for.
• 0:06
  Megan Horneman: This is Megan Horneman and this is Markets with Megan.
• 0:08
  Megan Horneman: We're back this week because we wanted to address the Jackson Hole Symposium where the Federal Reserve Chairman, jerome Powell, basically baked in the rate cuts for the next meeting in September.
• 0:19
  Megan Horneman: That meeting is held September 17th and 18th.
• 0:22
  Megan Horneman: What does that mean?
• 0:23
  Megan Horneman: First of all, there's three main questions.
• 0:25
  Megan Horneman: Now that we have this pivot and the next move is likely rate cuts, there's been three questions that come to mind.
• 0:31
  Megan Horneman: First of all, is inflation officially behind us?
• 0:33
  Megan Horneman: Second of all, how aggressive can or even does the Fed need to be?
• 0:38
  Megan Horneman: And then, lastly, is it now OK to say that the Fed has orchestrated this perfect soft landing?
• 0:43
  Megan Horneman: Now, what the Fed did on Friday is remember they have a dual mandate.
• 0:47
  Megan Horneman: It's maximum employment and price stability.
• 0:49
  Megan Horneman: They've been focusing on that price stability, which is inflation, for the past two years, and they came out on Friday saying that the risks have now turned and shifted more towards the weakening in the labor market.
• 1:03
  Megan Horneman: So they believe that this policy shift is necessary.
• 1:05
  Megan Horneman: Now, from the inflation standpoint, yes, they've done a lot of hard work aggressive rate hikes, a fixing of the supply chain.
• 1:13
  Megan Horneman: This has all contributed to inflation at the headline consumer price index level, going from about 9% all the way down now to 2.9.
• 1:23
  Megan Horneman: We've also seen a big deceleration in the core level as well.
• 1:27
  Megan Horneman: We're not quite at the Fed's 2% target, but they have told us that they wouldn't wait until we got there, until they would cut rates.
• 1:34
  Megan Horneman: Now what we're keeping an eye on, though, from the inflation standpoint, is that the sticky side of inflation and we've talked about this often this is primarily in the service side.
• 1:44
  Megan Horneman: This is primarily in the service side.
• 1:45
  Megan Horneman: This is still growing at very uncomfortable levels for the Fed, and there is always that risk of reigniting inflation if they get too dovish.
• 1:53
  Megan Horneman: They've made it clear they don't want to stop and go monetary policy, so they are walking a fine line there when it comes to the inflation standpoint.
• 2:01
  Megan Horneman: Now, how aggressive can they be?
• 2:03
  Megan Horneman: There's a lot of expectations that they'll cut 50 basis points at the inflation standpoint.
• 2:05
  Megan Horneman: Now, how aggressive can they be?
• 2:05
  Megan Horneman: There's a lot of expectations that they'll cut 50 basis points at the September meeting.
• 2:08
  Megan Horneman: This completely hinges on the labor market report that we'll get next week.
• 2:11
  Megan Horneman: If that labor market report comes in okay or better than expected, those 50 basis points will be priced right out of the market.
• 2:19
  Megan Horneman: So we think that they do have the flexibility because we've seen basically a 0.6% increase in the unemployment rate over the past six months, typically leading up to a Fed rate cut all the way back to 1966.
• 2:32
  Megan Horneman: We looked at all the Fed rate- cutting cycles.
• 2:34
  Megan Horneman: You tend to see inflation only up about 0.1% before they start cutting rates.
• 2:39
  Megan Horneman: So it's not out of the realm of possibilities that they can come in and adjust policy in September.
• 2:45
  Megan Horneman: However, the unemployment rate still does remain pretty low in historical standards.
• 2:50
  Megan Horneman: So they have to be very careful there on how aggressive that they cut rates.
• 2:54
  Megan Horneman: We are not in the camp that they can be that aggressive.
• 2:57
  Megan Horneman: The last question that is out there is have they orchestrated a soft landing?
• 3:01
  Megan Horneman: The equity markets would tell you they have.
• 3:03
  Megan Horneman: They would tell you, with basically most of the equity markets sitting at a record high, is they have orchestrated this perfect soft landing?
• 3:10
  Megan Horneman: That is extraordinarily rare.
• 3:11
  Megan Horneman: We're not there quite yet, not so fast.
• 3:15
  Megan Horneman: And when you look at all of the economic data, economic data is falling pretty quickly.
• 3:19
  Megan Horneman: We saw it as well today with the preliminary reading on durable goods.
• 3:22
  Megan Horneman: This doesn't necessarily mean that we're in for a soft landing.
• 3:25
  Megan Horneman: Can it be a harsher, harsh landing instead of this hard landing recession?
• 3:31
  Megan Horneman: It's still early to tell, but there was many different things that we see that are recession leading indicators, that are warning, flashing warning signs, and they've been doing this now, for some of these more than a year.
• 3:42
  Megan Horneman: So we're not quite there to say that we are going to be able to skirt a recession.
• 3:45
  Megan Horneman: We are seeing this economic data continue to weaken.
• 3:49
  Megan Horneman: So what does that all mean?
• 3:50
  Megan Horneman: Where is our camp?
• 3:51
  Megan Horneman: What do we think with this?
• 3:52
  Megan Horneman: The Fed's going to likely come in in September.
• 3:54
  Megan Horneman: They'll cut interest rates.
• 3:56
  Megan Horneman: We're not ready to say 100 basis points for the rest of this year is in.
• 3:59
  Megan Horneman: We're also not ready to say over 200 basis points over the next year is completely doable for the Fed because the inflation is still not exactly where they want it to be.
• 4:09
  Megan Horneman: Basically, the unemployment market, the labor market, still remains good, not great.
• 4:16
  Megan Horneman: It's getting weaker, but we haven't seen a big spike in the unemployment rate that you tend to see in recession, so we don't know how aggressive that they can be.
• 4:23
  Megan Horneman: Also, when you look at the money supply, we've seen money supply actually increasing here in recent months, so that's an inflation indicator.
• 4:31
  Megan Horneman: That's something the Fed has to be careful of.
• 4:33
  Megan Horneman: So they're walking a very fine line.
• 4:35
  Megan Horneman: We think that we'll probably get one basis at 25 in September, maybe another in the November meeting and then in December.
• 4:43
  Megan Horneman: But I think that there's also the chance that they'll be in this kind of wait and see mode.
• 4:47
  Megan Horneman: They're going to keep the markets on their toes as far as every meeting they can make an adjustment to policy.
• 4:55
  Megan Horneman: The problem that we see is with the equity markets.
• 4:57
  Megan Horneman: They're pricing in this very aggressive tightening cycle and also this perfect landing in the economy.
• 5:03
  Megan Horneman: That's what concerned us, with elevated inflation, with high expectations, with all of this already priced in where we are right now, there's a lot of room for disappointment.
• 5:11
  Megan Horneman: So the markets will be closing, falling very closely to that employment report next week.
• 5:16
  Megan Horneman: We'll be back.
• 5:17
  Megan Horneman: This week there's lots more economic data we'll be out with and we'll be back to discuss how that's impacting markets.
• 5:22
  Megan Horneman: And again, if you like this, please subscribe.
• 5:24
  Megan Horneman: You know, like hit that alarm bell.
• 5:30
  Megan Horneman: And if you want a bigger library of our podcast of Markets with Megan, feel free to go to marketswithmeganfm.
• 5:33
  Megan Horneman: Thank you.