A Fed Mistake?
August 01, 2019
As we see it, the measures of success for the U.S. Federal Reserve (Fed) July meeting policy decision were for the yield curve to steepen and for the U.S. dollar to weaken. The opposite happened: the curve flattened and the U.S. dollar rose. This signals to us that the Fed made a policy mistake by cutting rates 25 basis points (bps) instead of 50.
We have been strong advocates of a 50 bps rate cut despite the overwhelming market consensus for a 25 bps cut. The Fed delivered on market expectations, but missed on meaningful guidance during its press conference. The market expected a 25 bps rate cut alongside dovish guidance, but Fed Chairman Jerome Powell did not communicate this to the market. Our rationale for a 50 bps cut was as follows:
Nevertheless, this event does not serve as a catalyst to materially change current portfolio positioning at the moment.
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