When the FOMC has to keep cutting interest rates, it is not a positive sign.

The FOMC announced a 50bps reduction to the Fed Funds target rate.  The FOMC has lowered the Fed Funds Rate by 125bps since July of 2018.  In an October post, we noted that when the FOMC has lowered the Fed Funds rate more than three times and by more than 75bps, the U.S. economy has ended up in a recession.  There is nothing magical about three rate cuts or 75bps, but when the FOMC has had to become more accommodative than that it has been associated with periods when the economic trajectory became weaker than the FOMC had anticipated.  Each economic period is different and there is a chance that the current expected economic weakness related to the Covid-19 virus is temporary and a recession is avoided.  In two prior posts, found here and here, we noted that economic activity in the U.S. and other developed markets ended 2019 already showing signs of weakness (before the impact of Covid-19).  There is a high possibility that the global economy will have a hard time recovering quickly, even if the impact from the virus is temporary, just based on starting conditions.  Another issue we have discussed before that is unique to this cycle is the record amount of corporate debt as a % of GDP. 

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Even a short interruption to business and cash flow could have an outsized impact on companies, which could force them to reduce their payroll (potentially only temporarily).  This could possibly slow the recovery period as consumers deal with the hit to their incomes.  One of the key data points we will be watching to see how companies respond is weekly unemployment claims.

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Another question investors have been asking is will the FOMC continue to lower the Fed Funds Rate at future meetings.  The futures market is expected two more rate cuts at this point, and expects more activity at the upcoming March meeting.

Source: Bloomberg.

One of the reasons the FOMC may continue to lower rates is the ongoing strength of the U.S. Dollar.  While the recent rate cuts have helped lower the exchange rates of developed markets like Euro, Yen, and the Pound, this has not been the case for many emerging market currencies.

Source: Bloomberg.

Source: Bloomberg.

Source: Bloomberg.

Source: Bloomberg.

Source: Bloomberg.

Source: Bloomberg.

Source: Bloomberg.

Source: Bloomberg.

Source: Bloomberg.

Without a reversal in this trend there will likely be more pressure put on the FOMC to try and bring down the U.S. Dollar.      

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.