U.S. stocks started their path back to recovery last week, and extended that rally on Monday, before stagnating and retracing some for the remainder of the week. Stocks fought their way back from a brutal selloff last month, inspired by Federal Reserve Chairman Jerome Powell’s intimation that the central bank was open to relaxing its monetary policy to save the economy. Now it seems, investors are counting on a rate cut. The question is, will it happen?
With trade war pressure, oil prices on the fritz, and generalized uncertainty as we enter into the summer, many investors are relying on the Fed to save the market and keep this bull run going.
“The market wanted to hear from Powell. When Powell says ‘we are watching the market’ — whether it’s right or wrong — the market starts believing in a Powell put,” said Keith Lerner, chief market strategist at SunTrust Private Wealth. He also noted “sentiment became extremely negative on a short-term basis.”
A growing number of economists and investors are relying on a midsummer rate cut to occur at the July 30-31 meeting. However, others expect the Fed to wait until September, giving themselves time to analyze more data before cutting rates. Then there are a few, such as economists at Goldman Sachs, who expect no cut at all this year.
“Although it is a close call, we still expect the FOMC to keep the funds rate unchanged in the remainder of the year,” Jan Hatzius, Goldman’s chief economist, said in a note last week “In our view, this was not a strong hint of an upcoming cut but was simply meant to provide reassurance that the FOMC is well aware of the risks from the trade war.”
Regardless of the direction the Fed decides to go, most economists agree that the market needs soothing, and that the Fed will offer a dovish message for investors.
“Right now, they’ll just give a very dovish message that leans toward a July rate cut,” said Joseph LaVorgna, chief economist for the Americas at Natixis. “The market is worried enough about weakness in China, inflation undershooting and the possibility that tariffs disrupt the global supply chain that it’s hard for me not to think the Fed won’t be moving faster than people thought.”
The Fed’s meeting next Wednesday is anticipated to be the most newsworthy event for markets in the coming week. However, there is also some other data being released such as manufacturing and services PMIs on Friday that could drive the markets as well.
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