When Powell Speaks, Markets Listen

When Federal Reserve (Fed) Chair Jerome Powell speaks, markets listen. Friday, August 23, the markets had a new opportunity to gauge the Fed’s direction when Powell gave a closely watched speech at the annual gathering of central bankers in Jackson Hole, WY. This was Powell’s first opportunity to follow up on the release of the minutes from the Fed’s July 30-31 policy meeting, where the Fed cut its main policy rate for the first time since the 2007-2008 financial crisis. The minutes revealed general consensus among the meeting attendees that a cut was necessary, as well as a lively debate about the overall future path of rates.

Powell returned to standard talking points at his Jackson Hole speech. He said the economy “continued to perform well overall,” but he highlighted increasing risks from a deteriorating global economy and uncertainty around trade, the same risks that induced the Fed to cut rates in July. While he didn’t lay out a clear policy path, Powell pledged that the Fed would “act as appropriate to sustain the expansion,”  potentially laying the groundwork for an additional rate cut when the Fed next meets September 17–18.

“We agree that U.S. economic fundamentals remain sound, even in the context of slowing growth,” said LPL Financial Chief Market Strategist John Lynch. “But the market is also sending strong signals that policy remains too tight given risks from trade and slower global growth.”

Low inflation expectations, an inverted yield curve, and U.S. dollar strength from elevated yields compared to other major developed economies all are adding to the argument that policy is too tight. We think further “insurance” cuts may be merited, but we would not view another rate cut as the Fed trying to get ahead of a recession. The Fed works best when it’s pragmatic, and further cuts would fit in well with its history of sensible course corrections.

IMPORTANT DISCLOSURES

Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Market implied rate hike expectations are calculated based on the pricing of various fed funds futures contracts.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

All company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (Member FINRA/SIPC).  Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL is not an affiliate of and makes no representation with respect to such entity.

If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:

Member FINRA /SIPC

For Public Use | Tracking # 1-886541