Subscribe
Share
Share
Embed
Key Wealth Matters, a podcast series hosted by the experts of the Key Wealth Institute, explores the biggest news of today to determine how these headlines can impact wealth plans, financial strategies, markets, and investments.
Join our team of advisors for unbiased, proactive advice about individual and family finances, estate and legacy planning, family dynamics, investing, as well as trends for business owners, nonprofits, and institutions.
To submit potential topics or questions to our experts, contact us via email at kpb_wealth_institute@keybank.com.
For more information, articles, or other insights related to wealth management, visit key.com/ourinsights.
The Key Wealth Institute is comprised of financial professionals representing Key entities including Key Private Bank, KeyBank Institutional Advisors, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.
This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are provided by KeyBank National Association (KeyBank), Member FDIC and Equal Housing Lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank. Investment products, brokerage and investment advisory services are offered through Key Investment Services LLC (KIS), member FINRA/SIPC and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, Inc. (KIA). KIS and KIA are affiliated with KeyBank.
Investment and insurance products are:
NOT FDIC INSURED • NOT BANK GUARANTEED • MAY LOSE VALUE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY
KeyBank and its affiliates do not provide legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions.
©2023 KeyCorp®. KeyBank Member FDIC. 230327-1991928
Brian Pietrangelo:
Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, September 20th, 2024. I'm Brian Pietrangelo and welcome to the podcast.
You might not realize it, but this Sunday, September 22nd, marks the beginning of the autumnal equinox, which is also known as the season of autumn or fall, which again occurs this Sunday and is one of only two times during the year when the sun is over the equator, which equally divides sunlight and evening from the perspective of this is why it's called the equinox. A changing of the season usually brings great colors on the trees in terms of their leaves changing color for the autumn season, and in addition for us, very coincident with a change in the season for the Federal Reserve's interest rate policy having had a significant increase in rates in 2022 and 2023, then pausing and now shifting to a rate cutting cycle beginning just this past Wednesday, September 18th.
So we will certainly talk about that with our panel today, who I'd like to introduce right now, Rajeev Sharma, Head of Fixed Income, Cindy Honcharenko, Director of Fixed Income and Connor Cloetingh, Senior Equity Analyst. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our key questions article series addressing a relevant topic for investors each week. In addition, if you have any questions or need more information, please reach out to your financial advisor.
Taking a look at this week's market and economic news, we've got four updates for you. Beginning first with retail sales for August, which was a preliminary read that came out on Tuesday of this week, were up 0.1%, which was a significant decline from the prior month in July, which was up 1.1%. So again, we know this number is preliminary and it does get revised, but we talked about this vacillation each month to month of very positive news on retail sales. Then some slowing news on retail sales. So we'll try and figure this out to see if there's a trend anyway on the consumer, whether it's heading in the right direction or whether it's slowing in the overall economy.
Second, also on Tuesday of this week, industrial production came out for August, also preliminary, and it was up 0.8%, which was again a dramatic change versus July, which was down 0.9%. Again, that's a good news story on the manufacturing side of the economy as a complement to the consumer side of the economy and we'll again read that through to see if that vacillation again becomes a positive trend or a negative one in terms of industrial production as well.
And third, on Thursday of this week, just yesterday, initial unemployment claims remained very low and stable at 219,000 initial claims for the week ending September 14th, which was a drop of 12,000 from the prior week. So again, this number has remained fairly stable. Good news story in terms of the employment front that we are not seeing this number tick up, and again, we'll take that as a positive sign for the labor market right now.
And fourth, which is probably the biggest news and most notified news in terms of the week, is the Federal Reserve's Open Market Committee decision to cut rates on Wednesday of this week by 50 basis points. So we'll certainly have a large dialogue with our panels today around this conversation of the Fed, what it means, why they did it, and where we're headed in the future. Let's jump right in with that to talk with Cindy in terms of what the Fed said, what did the Fed do, what are the implications and how should we interpret things for the remainder of the year? Cindy?
Cindy Honcharenko:
So the Fed cut the federal funds rate by 50 basis points bringing the target range to 4.75% to 5%. Interest on reserves was also cut by 50 basis points to 4.9%. The pace of balance sheet runoff was unchanged at 25 billion per month for treasuries, 35 billion per month for mortgages and Powell said that the rate cuts and balance sheet runoff can happen side by side as they both are a form of normalization. Therefore, as long as the US economy remains resilient and the federal funds rate sits above neutral, the committee has the flexibility to keep QT going as a housekeeping mechanism to reduce its balance sheet.
Policy statement, the committee did mention that job growth had slowed but repeated that overall growth remains solid. More progress has been made on the achievement of the inflation goal. What I did not expect was a 50 basis point cut. I don't know about the rest of you, but I did not have a hawkish 50 on my bingo card. I thought that the Fed sent a clear message before the pre-meeting blackout period that they were going to start slow. I must have misheard the message because nothing in the data released during the blackout period suggested that the Fed needed to start with a bigger cut.
That being said, the guidance does not suggest that we should expect a series of 50 basis point cuts going forward. The statement repeats the same language describing the balance of risks. Specifically "the economic outlook is uncertain and the committee is attentive to the risk to both sides of its dual mandate." There's a small but growing concern about the labor market and a modest increase in confidence in achieving the 2% inflation target. Further developments moving in these directions could trigger more cuts, but the base case expectation for the economy is that expansion is going to continue.
Moving to the press conference, Powell's opening statement reiterated the Fed's commitment to achieve the inflation side of the dual mandate and an expectation that the economy will not slow down materially. Essentially he said we are achieving the soft landing. At the onset of the Q&A. He was challenged with the question about what had changed since July such that they had felt comfortable with a pause then but cut 50 basis points now. Powell's response was that they would've cut in July had they known the details of the July employment data and that the 50 basis point cut on Wednesday is not a sign that they're behind the curve but rather a commitment to make sure that they do not fall behind the curve. As the presser went on, he made it clear that there's no sense of urgency of getting rates down to any particular level and more than once, he said the summary of economic projections was not intended to show the Fed is in a rush, that they're going to closely watch the labor market for signs of further policy calibration but nothing's guaranteed.
He also briefly discussed the estimate of the neutral rate a few times. He didn't go into much detail beyond his belief that the rate was likely higher than it was pre-pandemic and this sort of undersold the significant upward revision to the median dot for the long run rate since December 2023. Which I think it's pretty important, the neutral rate represents the likely terminal rate for this cycle, so any upward revisions reflect fewer total cuts overall.
Moving to the summary of economic projections that showed a big drop across the time horizon for rates, but mostly due to a quicker start to the cutting cycle. The dots reflect 50 basis points of additional easing this year despite the median being revised down 75 basis points. If you look at the distribution, two dots show no more cuts after Wednesday's meeting. Seven show just 25 basis points of cuts, nine show 50 basis points and just one shows 100.
If one of the nine at 4.375% had submitted a 4.625% dot that they would've shifted the median 25 basis points higher than that level. In each of the last four SEPs including this one, we've seen more shifts in forecasts in the long run rate than we can recall for quite some time. The Fed has taken a lot of criticism since rates peaked in mid-twenty-twenty-three because disinflation has been slow and stubborn. It is possible that the Fed's failure to achieve the inflation side of the dual mandate is rooted in misunderstanding in the neutral rate, though it is impossible to know that for sure. The most vocal Fed officials on the issue have been adamant in defending their views on two and a half percent being the neutral rate, but it looks like their more silent colleagues are reconsidering that. There's still nine dots at 3% or higher unchanged from June, and this compares with seven dots from above 3% in March and four dots above 3% in December.
The increase in the median this month reflects forecasts that were already above 3% being revised higher. But overall the projections send somewhat of a hawkish message because they gave us a 50 basis point cut. But if you look at the dots, and even though there was one descent from Michelle Bowman, there were probably other committee members who would've gone along with the 25 basis point cut if that was what Chair Powell wanted, but they were probably persuaded to go 50 in the end.
GDP growth was revised down modestly 2% across the four years, and inflation data was revised down modestly to reflect the disinflation of the past few months. The attainment of the inflation goal is still in 2026 as it was in the June SEP. There was a shift in the unemployment rate in 2024 and 2025 and the forecast for this year was revised up to 4.4% for the end of both years, 4% at 4.2% respectively. This reflects the increase in unemployment since June, though it is somewhat surprising that the forecast for 2025 is unchanged. I'm thinking this is likely a result of the structure of the forecasting task, which is "appropriate policy," and I think forecasting further increases unemployment would suggest that the policy wasn't working properly.
Two notable things from Wednesday, I think one of them was Powell's comments about the market should not expect necessarily similar sized rate cuts going forward and a view that the neutral rate might be higher than previously thought. And then finally, the decision on quantitative tightening. I just figured with them going 50 basis points on a rate cut that the committee would've clearly either paused QT or slowed it down and they didn't do either of those. Rajeev. I'm hoping you can make more sense of what the Fed did and what we heard from Powell on Wednesday.
Rajeev Sharma:
Well, great recap, Cindy, but you're absolutely right. I mean I think a lot of the market participants did not expect 50 basis points to come out on Wednesday. And I think we've heard the adage for a long time that don't fight the Fed. For me the way I look at this by coming out with a 50 base point rate cut, the Fed kind of gravitated towards market expectations rather than the other way around. And this was a pretty aggressive start to their rate cutting campaign. The Fed showed that they are very concerned with trying to protect maximum employment and they're satisfied with the progress that they've made so far in bringing inflation down to that 2% target.
So if you think about the Fed's dual mandate and what messaging this is sending, in my opinion, inflation is now on the back burner for the Fed. They're really focused on the unemployment rate and they want to make sure that the labor market does not cool any further. What I find interesting is that the Fed's new summary of economic projections have been revised to show another 50 basis points of rate cuts for 2024. This is exactly in line with what the market was expecting right before the Fed meet, but the market has now once again added more rate cuts in their expectations for 2024.
The market now expects not 50 but 75 base points of rate cuts by the end of the year, additional rate cuts. So once again, there's this disconnect between the Fed and market expectations. Markets have consistently shown a pretty big bias towards Fed easing. The market now sees that this jumbo rate that we got this week is kind of a signal that the economy has weakened since the last time we got the summary of economic projections.
Now if you look at the yield curve, the immediate reaction from the yield curve from the Fed was it sent yields lower in the front end and the front end of the yield curve is most sensitive to monetary policy. The long end of the yield curve has a more muted reaction to the Fed cut. There are some worries that the inflation could start to creep back up perhaps leading to of somewhat of an economic downturn. This has caused the yield curve to steepen.
If we look at credit markets, credit spreads continue to move tighter post the Fed meeting and we anticipate a further ramp up in new issue deals to start next week, and this is going to satisfy or attempt to satisfy the continued investor demand that we've seen for corporate credit. Now, lower rates will likely work to reduce the appeal of money market funds and that could lead to a rotation into duration and risk products like credit. So we're going to keep an eye on that as well.
Brian Pietrangelo:
So Rajeev and Cindy, let's talk a little bit more and really on the minds of a lot of our listeners, the 25 versus 50 debate that happened, we certainly got the clear signal it was 50. So if we go back in history to last six cutting cycles beginning back in 1989, four of them began with 25 basis points and only two of them began with 50 basis points. And the two that began with 50 basis points were some really problematic areas. One was in 2001 coming out of 9/11, the tech bust and the overall general recession with pretty much a need to do 50 and the second was coming out of the global financial crisis in 2007, 2008 with a definite need to do 50. What do you think this message sends to the market in terms of going 50 rather than 25?
Rajeev Sharma:
I think what happens here, Brian, is you made a very good point. I mean an aggressive start to rate cutting cycle, the magnitude of that start at 50 base points is important to note. And I think the reason is, we've talked about it before, that it's not when the Fed was cutting rates, it's why the Fed is cutting rates? In the past, it was more of an aggressive start in those examples that you gave because you were seeing an economy that was pulling down quite fast and it was an attempt by the Fed to really start to stir some action and those generally proceeded a recession or you were already in a recession.
In this case, I think the Fed by doing 50 basis points, they want to show that they're not behind the curve. They want to basically protect the economy if they can. They want that soft landing scenario that they've been pushing. They do believe that they'll achieve the soft landing. My feeling however, is if they would've done 25 basis points, that would've given them some optionality to do more of aggressive rate cuts going forward, now that optionality is not really there.
So they're going, they're swinging at it right at 50 basis points and we're going to see if that was the right call or not. If we do see inflation start to creep back up the Fed and the markets would hate to see a policy error here. So 50 basis points, question is I think the odds right now for November around 33% for another 25 basis point rate cut. So we're have to see how this plays out, but according to your examples there, this is an aggressive start.
Cindy Honcharenko:
And I would agree with that. I also wanted to point out the 10-year. We were holding at 367 and then now we see the 10-year up to 375. To me, the bond market is clearly signaling there could be some trouble ahead. We could be heading toward a recession. So I think we need to keep an eye on the 10-year.
Brian Pietrangelo:
Great. And then Cindy, we'll start with you and again go back to Rajeev on my second question, which is when we look at the summary of economic projections, and again, these are projections by the Federal Reserve members for upcoming years around various five or six items for which we're going to delve in pretty clearly.
But the first one is they've talked about taking the neutral rate down to something in the vicinity to 3.5% as a Fed funds rate. But if you look at the projections for unemployment and for real GDP growth going from '24 to '25, in terms of 2024 and 2025, they didn't go up. So it was interesting to me that this may or may not signal their projections for a softening market or a soft landing, but not an increase in overall unemployment. And that's a balancing act that you talked about getting to that neutral rate. Cindy, any comments?
Cindy Honcharenko:
I would agree with you on that, Brian. We're definitely getting some mixed messages from their projections and we have to keep in mind, and Powell has mentioned it too, that these are just projections. They're not sitting around and in groups trying to match projections. It's just what they think could happen further down the road. And they don't really know what's going to happen, these are just their best guess. And since there is some misunderstanding on where they think the neutral rates should be, and now they're rethinking that, and Powell mentioned on Wednesday that he thinks it's higher than initially what they thought. I think that's why we're seeing the unemployment projections and inflation projections not matching up with the neutral rate, where they think that's ultimately going to land. So it's going to be interesting to see how this plays out as we get further along now that we're in this rate cutting cycle.
Rajeev Sharma:
And I would just add that the market's expecting a far lower neutral rate than what the Fed is projecting here. So again, that disconnect that I spoke about earlier, that exists when you're discussing the final neutral rate as well. So it's going to be very interesting. And to Cindy's point, these are projections, so they often will be revised based on economic conditions. So we'll have to continue to monitor that as well.
Brian Pietrangelo:
Great. Thanks for that commentary from both of you. As we'll switch to the equity market reaction to the Fed's cut of 50 basis points, originally on Tuesday after the press conference, things normalized and actually went negative, but then had a decent rebound almost up to record highs on Thursday. So Connor, what's your take on the equity market and any thoughts you have for us today?
Connor Cloetingh:
Yeah, I think that's an interesting question. All time high with a 50 basis point rate cut. So wouldn't think we'd be saying that all in one sentence, but that's where we are today. So where the equity market has been recently and just looking at the reaction following the 50 basis point cut, I like to look at what sectors have been underperforming or outperforming. So if we look at since the beginning of August really leading into the rate cutting cycle, it's been utilities and real estate and consumer staples. So more of the classic defensive sectors that have been outperforming as maybe some economic data has come in weaker. And then following the 50 basis point cut, the market had a complete 180 on that where we saw more of the cyclical growthy sectors like tech com services and consumer discretionary, which were the sectors that were outperforming initially following the rate cut.
So what that tells us is... And at the same time these defensive sectors, they were just roughly flat, so it's not like they necessarily saw a large sell off. So that gives us some confidence that this rally and where we are is broadening out to other sectors and it doesn't necessarily give us cause for concern in the equity markets heading into the end of the year, but remains to be seen.
Brian Pietrangelo:
Well, thanks for the conversation today, Rajeev, Cindy and Connor. We appreciate your perspectives and thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app.
As always, past performance is no guarantee of future results and we know your financial situation is personal to you so reach out to your relationship manager, portfolio strategist or financial advisor for more information. And we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you navigate your financial journey.
Speaker 5:
Key Wealth, Key Private Bank, Key Family Wealth. Key Bank Institutional Advisors and Key Private Client are marketing names for Key Bank National Association or Key Bank and certain affiliates such as Key Investment Services, LLC or KIS and Key Corp Insurance Agency, USA, Inc. or KIA.
The Key Wealth Institute is comprised of financial professionals representing Key Bank and certain affiliates such as KIS and KIA. Any opinions, projections or recommendations contained herein are subject to change without notice, are those of the individual authors and may not necessarily represent the views of Key, Bank or any of its subsidiaries or affiliates.
This material presented is for informational purposes only and is not intended to be an offer, recommendation or solicitation to purchase or sell any security or product or to employ a specific investment strategy. Key Bank nor its subsidiaries or affiliates represent, warrant or guarantee that this material is accurate, complete, or suitable for any purpose or any in investor and it should not be used as a basis for investment decisions. It is not to be relied upon or used in substitution for the exercise of independent judgment. It should not be construed as individual tax, legal or financial advice.
The summaries, prices, quotes, and or statistics contained herein have been obtained from sources believed to be reliable but are not necessarily complete and cannot be guaranteed. They are provided for informational purposes only and are not intended to replace any confirmations or statements. Past performance does not guarantee future results. Investment products, brokerage and investment advisory services are offered through KIS, member FINRA, SIPC and SEC Registered Investment Advisor. Insurance products are offered through KIA. Insurance products offered through KIA are underwritten by and the obligation of insurance companies that are not affiliated with Key Bank.
Investing involves risk including potential loss of principal amount invested. There is no guarantee that investment objectives will be achieved. Past performance does not guarantee future results. Asset allocation and diversification do not guarantee returns or protect against losses. Investment and insurance products and services are not FDIC-insured, not bank-guaranteed may lose value, not a deposit and not insured by any federal or state government agency. This content is copyrighted by KeyCorp 2024.