It's official - we have the first rate cut since the great recession. And, of course, everyone has an opinion on whether it was too little, too much, or just right. So, here is another opinion to add to the pile!
As I mentioned last month, I was of the opinion they shouldn't cut. That is a bit contrarian but not super contrarian to some extreme like "Oh, they should actually RAISE rates." I stand by my original opinion but I also have seen a few data points floating around (mostly in manufacturing) that suggested a cut was needed. The bottom line is, the Fed has a really tough job and they are by far the most qualified individuals to figure this out. So, I will gladly accept my opinion was wrong compared to their action to cut because I do trust that they know what is best!
One reason I have held the view that rates should not be cut is because I am not in agreement with some popular financial commentary opinion on why they should be cut - namely, because the stock market will get upset otherwise. By several metrics, stocks are at high valuations. We want to sustain the expansion but keeping stock prices from falling should not be the overall goal. This period of extended low rates has pushed stocks higher than might otherwise be warranted and people have gotten use to that but low rates are not the norm compared to the last several decades. Maybe it keeps stock prices higher but it comes at a cost of throwing other market forces out of alignment. Eventually, the system will correct. The longer the party goes on, the worse the hangover.
In other news, GDP came in better than expected at 2.1%. So, things have slowed a bit from the previous year but that slowdown was also expected. That being said, the revision in previous quarters of GDP data did push up the EMRI as of 2019Q1 from 0.21 to 0.25, which is actually the highest reading since the financial crisis, when it was at 0.30 in 2009Q3. Before we panic though, it did hit 0.24 in 2015Q4 and it is still well below the recession indicator threshold of 0.39.
In June, the jobs report was mentioned as something interesting to watch. It came in looking just fine and avoided a strong continuation of the hiring slowdown trend that had been forming. Either way, the jobs report this Friday remains a crucial indicator to watch.
Also, last month, the Fed decision was noted. Well, they did it. Now, there will be some wait before the next decision to stay the same, or cut, or...perhaps raise? Let's leave that to the financial news cycle to endlessly debate and speculate. Since rates are dropping, it will be interesting to watch equity and home prices as one would expect to see valuations increase all else equal.
For 2019Q3, I haven't seen anything yet that changes my opinion that there will not be a recession. The rate cut should be a positive boost to keep the party going. The ERMI has not shown much of a change from the new data since last month.
For 2019Q4, (I will even keep the same language here that I had last month) the impact from the flattening yield curve makes things dicier but there would need to be negative GDP readings to really start some panic. As of now, since I try to force myself to have an opinion even if it could be wrong, I don't see a recession starting. Let's keep this expansion (and, no, I don't just mean high stock prices) rolling!
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