This week, the Federal Open Market Committee (FOMC) will conduct a two-day meeting from Tuesday, September 17 to Wednesday, September 18, culminating in a rate decision to be released at about 2PM EDST on Wednesday, followed by a press conference by Chairman Powell.
This is a much-awaited rate decision which is likely to result in the first rate cut (easing) since the Global Pandemic in 2020. Since March 2022, the FOMC has embarked on a rate hiking (tightening) program. The last tightening took place in July 2023 resulting in a Fed Funds Target Rate range of 5.25% to 5.50%. I am on record as saying that the Fed went too far with their tightening.
One must understand the FOMC controls the short end of the curve. It achieves monetary policy through the repo and reverse-repo markets (this is not forum for describing how that works). Longer maturities are dictated by the financial markets, except for the post-financial crisis period in which the Fed bought long term paper in what was referred to as Quantitative Easing (QE). QE was an extraordinary method by which the Fed and foreign central banks sought to inject additional liquidity to combat the effects of the financial crisis. The FOMC has worked over the past few years to reduce its balance sheet and unwind the QE. The size of the Fed balance sheet is well off its peak at around the June 2020 level. However, ,more work needs to be done on the balance sheet.
In My Gut Feeling for 2024, I opined that the FOMC would ease by 75 basis points in rate cuts in 2024: 25 basis points in June or July and then 50 basis points after the election. Clearly the FOMC has waited till September to take any action. Here is how I handicap what the Fed will do:
1 – This week, I expect a 25-basis point cut. While the economy has weakened this year, we are still not amid a recession, though a mild one may come soon. However, as I have written in the past, the economy has pockets of recession but across the map in the aggregate, one cannot say that we are experiencing a recession. The Fed has backed itself into a corner and in my opinion had enough data (some of which the public does not have) to start the easing in July. While some people are calling for a 50-basis point cut this week, I am concerned that: 1. the Fed would appear to be panicking and 2. does not want to make a political statement with a larger cut.
2 – At the November meeting, which takes place just after the 2024 elections, the Fed could choose to ease by 50 basis points. Again, this may display a sense of economic fear in the markets. Hence, I expect a 25-basis point rate cut in November as well.
3 – Absent a 50-basis point easing in September or November, the Fed should ease another 25 basis points as a holiday present to the financial markets.
Interestingly enough, ahead of the Fed rate decision, the 2-10 spread (yield on the 10-year US Treasury less the yield on the 2-year US Treasury) has turned positive (normal) for the first time since July 2022. This is a good sign. As the Fed easing continues, the US Treasury yield curve will finally no longer be inverted, again a good sign for the credit markets, especially for lenders and borrowers.
Markets could be jittery or tentative leading up to Wednesday’s decision. So, buckle up and watch and listen to what unfolds this Wednesday, as it might be an indication of what to expect from the bond and stock markets for the rest of the year. I am already seeing a decline in the yields of so-called dividend stocks. This is partly due to price increases in the related stocks and a general lack of dividend increases as some companies are opting to instead buy back stock.
One of the market sectors that has improved in anticipation of an easing cycle is the Real Estate Investment Trusts (REITs). One example of a long-term holding in our Dividend Value Strategy is Stag Industrial (STAG). I think that one sub-sector that you may become cautiously optimistic in is the Retail REITs, but I have not put any capital into those stocks yet.
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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC were long STAG, although positions may change at any time. The mention of a stock is not a recommendation and may not be a suitable investment for your individual situation.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, (LVAM) an investment advisor representative, specializing in high-net-worth private wealth management. LVAM is a separate entity of Osaic Advisory Services, LLC, a registered investment advisor.
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