Equity Markets Run Ahead of the Fed

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Special Guest Blogger: Tim Kearney

Equity markets have warmed to the “less restrictive trade” and “lower interest rates” week. The news on trade has been better, no question. As for the Federal Reserve, the labor market data themselves do not support a cut. The average payroll figure over the past three months is 151,000, above trend growth in the labor force. Most indicators of labor market slack are not flashing red: average hourly earnings at 3.1% YoY, unemployment claims holding at historical lows, unit labor costs falling and productivity rising. While some analysts are pointing to the CPI printing as a rate cut trigger before the Federal Open Market Committee’s June 19 meeting, the market is pointing to the Fed “passing” this month.

There has been a rush in expectations for a cut at the July meeting. Fed fund futures are now signaling that the market estimate of the probability of the FOMC maintaining its current fed funds target has slipped below 20% from 86% a month ago; what’s more, the probability of two cuts by September is now more than 60%. I believe that this rate cut optimism is premature since the data do not support it yet. While the United States and the rest of the world are slowing, economic growth is above trend and the likelihood of recession remains low. It is not clear to me why the Fed would move ahead with a series of insurance rate cuts right now and leave itself without any ammo for later.

For background on the fed funds target rate, please see page 34 of the Voya Global Perspectives book.

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