A Gift From The Fed? How The Rate Pause Could Help Make Conditions Just Right

Video Length: 00:05:27

On the latest edition of Market Week in Review, Senior Quantitative Investment Strategy Analyst Dr. Kara Ng and Research Analyst Brian Yadao discussed recently-released minutes from the U.S. Federal Reserve (the Fed)’s Jan. 29-30 policy meeting. They also dug into trade war negotiations between the U.S. and China and the latest Purchasing Managers’ Index® (PMI) estimates for Europe, Japan, and the U.S.

An accommodative Fed and mediocre economic growth: The right mix for markets?

The Fed’s meeting minutes, released Feb. 20, confirmed that the central bank’s newly-adopted dovish stance has not been overblown, Ng said. “Late last year, the Fed was still on track to continue raising interest rates at a quarterly pace,” she said, explaining that the central’s bank’s dovish turn came during last month’s policy meeting, when it removed language about future rate increases, noted that inflation was muted and implied that downside risks were increasing.

So, could a more accommodative Fed help push back the onset of the next U.S. recession? Quite possibly, Ng said. “At Russell Investments, we think that late 2020 is when the risks for an economic downturn will become increasingly elevated,” she stated, explaining that this is an adjustment to earlier outlooks, which had focused on late 2019/early 2020 as the more likely timeframe.

“Had the Fed continued its quarterly rate-hiking cycle, monetary policy likely would have become restrictive by early 2019, and the U.S. Treasury yield curve probably would have inverted,” Ng said, explaining that recessions typically follow yield-curve inversions by roughly nine to 18 months.

The Fed’s pause in rate increases, Ng said, effectively helps delay the next U.S. recession. This may lead to a Goldilocks scenario of accommodative Fed policy and positive, but mediocre, economic growth—just-right conditions that could allow risk assets to gently rise.

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