As expected, the Fed statement was significantly more dovish than the prior meeting, acknowledging a moderating job market and slowly improving inflation. In addition, the Committee stated that the risk to inflation vs. employment has moved into better balance. The press conference was in line with the statement and was consistent with preparing the market for a September rate cut, with Powell acknowledging that current policy is restrictive. Fed funds futures were unchanged after the meeting.
We continue to believe that this Fed is behind the curve, as usual, and should have cut rates at this meeting as harmonized PCE (Excluding the flawed owner’s equivalent rent component) is well below 2%. However, the fact that the Fed has clearly signaled a September cut has caused 10-year bond yields to plunge by over 50bp, which should stabilize the housing market as 30-year mortgage rates decline. The decline in rates should allow the US to avoid a recession during this Fed tightening cycle as the housing sector has historically been the key driver of recessions.
We reiterate our 6,000 target on the S&P and continue to believe that value/income stocks will outperform as rates decline. Global rates are likely to decline in response to global central bank rate cuts and the associated liquidity injection required to lower rates. The normal August/September market pullback is ahead of us, but we forecast the pullback will be moderate as we continue to believe that global rate cuts will support the market and we are forecasting a divided government will persist after the election, which is generally positive for both stocks and bonds.
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