Latest / Markets with Megan: A Quick Financial Markets Update / Economic Insights on Fed's Recent Moves | Episode 129 | 05-01-2024

Transcript

Economic Insights on Fed's Recent Moves | Episode 129 | 05-01-2024 · Markets with Megan: A Quick Financial Markets Update

• 0:01
  Megan Horneman: So anyone that was looking for any fireworks out of the Federal Reserve today were quite disappointed with this the release of the statement and then the press conference.
• 0:09
  Megan Horneman: It's Wednesday, may 1st.
• 0:10
  Megan Horneman: I'm Megan Horneman, the Chief Investment Officer with Verdence Capital Advisors, coming to you today with our regular segment of Markets with Megan.
• 0:17
  Megan Horneman: There was a lot of economic data out this morning, but we're going to focus on the Federal Reserve and what came out of their May meeting.
• 0:24
  Megan Horneman: They left rates unchanged.
• 0:26
  Megan Horneman: That was widely expected.
• 0:27
  Megan Horneman: They are going to slow the reduction in their balance sheet Again, that was widely expected.
• 0:33
  Megan Horneman: We knew that this would eventually happen.
• 0:35
  Megan Horneman: There's a lot of nuances with what they're doing with their balance sheet, but they had to start slowing the pace of that reduction of balance sheet at some point so that they don't threaten the liquidity in the system.
• 0:47
  Megan Horneman: But what is surprising is that they're slowing it on the treasury side much more than they had previously and more than was anticipated.
• 0:55
  Megan Horneman: And they left mortgage-backed securities unchanged.
• 0:58
  Megan Horneman: In their statement that they released they mentioned that the lack of further progress on inflation that was known that they would probably address that because of the most recent higher inflation readings.
• 1:09
  Megan Horneman: They did mention there's no rate cuts until inflation moves sustainably towards 2%.
• 1:14
  Megan Horneman: So if anybody thought they were going to change that 2% target that they've stuck with for many, many years, it did not change.
• 1:21
  Megan Horneman: Now let's get into the press conference Again.
• 1:25
  Megan Horneman: I'm not quite sure why I continue to tune into these, because it's the same thing he did mention.
• 1:31
  Megan Horneman: It's unlikely that the next move would be a hike that he did mention.
• 1:35
  Megan Horneman: The consumer's been strong, the labor market's been strong, but yet showing some signs of weakness.
• 1:40
  Megan Horneman: What do we make of this?
• 1:42
  Megan Horneman: Well, first of all, the equity market loves it and I've often said, whether it's politics or Federal Reserve or any of the economic data, the equity markets like it when they're not surprised with anything.
• 1:52
  Megan Horneman: So there was no mention of rate hikes in his statement and this is something that there was a slight expectation that he might come in open up the door that they may be able to hike rates.
• 2:04
  Megan Horneman: He continues to say they're data dependent.
• 2:06
  Megan Horneman: He says it all the time.
• 2:08
  Megan Horneman: It doesn't mean anything because obviously he's not looking at the most recent data.
• 2:11
  Megan Horneman: That's what concerns us the less treasuries hitting the market because they're going to slow, at a lesser pace.
• 2:17
  Megan Horneman: That's causing treasury yields to come down.
• 2:19
  Megan Horneman: That's also fueling this rally.
• 2:22
  Megan Horneman: So what do we make of this?
• 2:23
  Megan Horneman: What do we think going forward?
• 2:26
  Megan Horneman: We are frightened I have to say it's a harsh word that the Fed is too busy patting themselves on the back with what they've done to bring inflation from the highs after the pandemic to where we are today.
• 2:37
  Megan Horneman: That they're not focusing on what we're seeing in most recent data.
• 2:41
  Megan Horneman: We never look at a one month as a trend, but we've now had three months of surprising inflation data and slower growth.
• 2:48
  Megan Horneman: Some of this data is going in the complete opposite way.
• 2:51
  Megan Horneman: I'll make an example.
• 2:53
  Megan Horneman: We talked to you last week about the GDP report as well as the cost index.
• 2:57
  Megan Horneman: We got more information this week about inflation being higher in the first quarter.
• 3:01
  Megan Horneman: We also got the ISM report this morning.
• 3:04
  Megan Horneman: That shows that the economy is basically still in contraction territory from an ISM manufacturing perspective, but the prices paid component is now above 60.
• 3:15
  Megan Horneman: That is for those who don't understand what that is.
• 3:18
  Megan Horneman: That's high.
• 3:19
  Megan Horneman: That is an inflationary number.
• 3:21
  Megan Horneman: So I'm concerned that they're way too busy, way too focused on trying to satisfy these markets and they're not looking at the data that we're looking at on a daily basis.
• 3:32
  Megan Horneman: We think that the Fed's going to have their hands tied.
• 3:34
  Megan Horneman: They continue to come out with these dovish press conferences and dovish rhetoric and this market's going to continue to go higher and it's just refueling inflation.
• 3:43
  Megan Horneman: He was asked in the press conference about the easing of financial conditions that started last year and this had a lot to do with him making that pivot of hey, we're going to cut all these rates this year and we saw this resurgence in growth.
• 3:56
  Megan Horneman: Well, guess what comes with a resurgence in growth?
• 3:58
  Megan Horneman: A resurgence in inflation.
• 3:59
  Megan Horneman: And they refused to see this.
• 4:01
  Megan Horneman: So we're sticking with our recommendation from the equity perspective neutral, holding onto our cash.
• 4:07
  Megan Horneman: The cash isn't going anywhere.
• 4:09
  Megan Horneman: It's going to be earning you that 5% and we don't see that changing really for the remainder of this year.
• 4:15
  Megan Horneman: We're still in the camp that the economy may be able to slow enough that they can get comfortable to cut rates at some point at the end of this year.
• 4:25
  Megan Horneman: But I got to tell you my conviction in that is fading because of what they're doing now.
• 4:29
  Megan Horneman: They're not doing anything to slow down this inflation and that is a bit concerning to us.
• 4:35
  Megan Horneman: That's all we have today.
• 4:37
  Megan Horneman: If you have any questions, comments or feedback, please feel free to reach out to podcast at verdence dot com.
• 4:41
  Megan Horneman: Thank you.