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Portfolio Update & Rate Cut Thoughts
Digesting the Fed statement, some thoughts on dovish policy and a portfolio update.
Table of Contents
Coverage of catch-up earnings summaries, more conferences (Cloudflare, Snowflake. Datadog etc.), CrowdStrike Fal.con, Amazon Buy with Prime news and so much more is coming Saturday. Can’t wait to share.
1. Powell Presser Highlights
Policy – Cut rates by 50 basis points:
Dual mandate risks are now balanced (vs. almost in balance last meeting) between inflation and employment. Risks are no longer skewed towards inflation.
“Growing confidence” that policy “recalibration" can thread the needle of continued disinflation, resilient growth, & resilient labor markets.
Continues to reduce the size of balance sheet. This won’t stop just because of interest rate cuts.
The average Fed member expects about 2 more cuts this year & 4 in 2025 to get to a 3.4% rate. Lower estimate than in June.
The long-term neutral rate estimate moved from 2.8% to 2.9%.
“We don’t think we’re behind on policy. We think this is timely. You can take this as our commitment to not fall behind.” – Powell
Output:
Sees 2% GDP growth in the coming years.
Continued improvements in supply chain dynamics are supporting durable economic growth. Cuts allowed supply chain bottlenecks to ease as intended.
Economic growth was called solid. Sees stable 2nd half growth for 2024 as roughly stable vs. the 1st half’s 2.2% mark.
Equipment and intangibles investments picking back up from an “anemic pace.”
Employment & Consumer:
Consumer spending was called “resilient.” Still close to “maximum employment.”
The labor market is “cooling but reasonably strong.” Nominal wage growth is easing.
The labor market is now “a little less tight” than pre-2019. The labor market is no longer a primary source of inflation.
Sees the unemployment rate rising from 4.2% to 4.4% by end of year vs. 4.0% as of the June meeting. Watching for signs of sharp weakening. Not seeing them today.
Immigration contributing to better labor supply & upward pressure on unemployment.
“The labor market is in solid condition. The intention of our policy move today is to keep it there. That’s what we’re doing.” – Powell
Inflation:
No change to 2% target. They have higher confidence in reaching this goal without sharp economic weakening.
Market rents point to more housing disinflation. Slower than expected; direction is clear. Spoke on rate cuts potentially improving housing supply.
Long term inflation expectations remain well-anchored.
The Fed now sees a 2.3% PCE by end of 2024 and 2.1% by end of next year. Both lower than during the June meeting. Sees getting to 2% in 2026.
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