Fed’s rate cut decision risks ‘hiring’ investors – here’s what strategists say

With the Federal Reserve poised to start cutting interest rates on Wednesday, investors warned against policy “engagement”, calling for a cycle of gradual easing to build confidence in the economy.

Speaking at the Future Proof festival in California, David Kelly, global chief strategist for JPMorgan Asset Management, said the central bank risks “scaring people” by being too demanding.

“If they cut rates aggressively here, they will undermine confidence,” Kelly said in an interview with Yahoo Finance. “It’s like taking a piano down from the fourth floor of the building. You have to do it slowly and carefully.”

The FOMC meeting is set to formally end a years-long tightening campaign to curb inflation, marking a significant shift in policy. The latest consumer price index (CPI) showed prices rose 2.5 percent year-on-year in August, the slowest rate of growth since 2021, putting inflation within reach of the Fed’s 2 percent target.

But Wall Street remained divided over how aggressively the Fed should act to protect the labor market and avoid a recession — and whether to cut interest rates by 25 or 50 basis points. Kelly struck an upbeat tone, saying that while growth is likely to slow, the risks of a significant economic downturn remain low.

“Ultimately, you have to give me a reason why consumers stop spending, and I think it takes a lot to get American consumers to stop spending,” Kelly said.

Retail sales data released on Monday indicated relative resilience among consumers. Sales unexpectedly rose 0.1% in August, while July’s data was revised up to 1.1%. This comes as the labor market begins to show signs of slowing as the US economy added fewer jobs than expected in August.

Saira Malik, president of Nuveen equities and fixed income, said the rising cycle of high inflation and interest rates will eventually hit the consumer. It forecasts an economic recession “sometime” in 2025.

“We’re definitely cautious,” Malik told Future Proof. “Look at the history. Labor markets tend to crack immediately when a recession starts, so you can’t depend on employment to tell you when a recession is coming.”

Bryan Whalen, chief investment officer in TCW’s fixed income group, echoed those sentiments. The Fed’s policy change may delay a downturn in the economy but is unlikely to prevent it, he said.

“Whether it’s going to be a mild recession or a moderate recession, I think a lot of that is going to be determined by the reaction function of the Fed, by how bad things get,” Whalen said. “Is something breaking in the capital markets? And then how do they react from a rate and (quantitative easing) perspective? That will determine how deep this goes.”

The story continues

Investors are reassessing portfolios for a new interest rate environment

The rise in interest rates over the past two years has driven a high demand for cash and short-term assets, including things like CDs and short-term bills. Strategists at Future Proof said now is a good time to take a second look at that position as the Fed prepares to cut rates.

“Reinvestment risk is now the biggest investor concern and threat,” said Lauren Goodwin, chief market strategist at New York Life Investments.

Read more: What a Fed rate cut would mean for bank accounts, CDs, loans and credit cards

Callie Cox, chief market strategist at Ritholtz Wealth Management, told Yahoo Finance in an interview that investors need to be mindful of falling interest rates: “We’ve obviously seen the 10-year yield go from 4.7% to 3.7%. saying lock in rates now and understand why you’re holding cash where you are.”

Cox advises clients to shift their portfolios.

“Now is the time to invest in risk assets, especially if you’re a long-term investor and can handle some of the changes we’re seeing,” she said. “At the same time, prepare for a recession. Prepare a game plan”.

The traditional portfolio allocation of 60% invested in equities and 40% invested in fixed income has long been debated by investors and the registered investment advisors who made up the majority of attendees at the Future Proof conference.

Malik and Goodwin said the template can — and should — be tweaked.

“We’re looking at rebalancing, for example, large-cap stocks, where we’ve seen a lot of gains play out over the last couple of years, with lower- or mid-market private equity as an opportunity to balance a portfolio. ,” Goodwin said. “Be creative within that 60-40 benchmark.”

Malik went further, saying, “The 60-40 evolves into a 50-30-20,” meaning 50 percent equities, 30 percent fixed income, and 20 percent alternatives.

Kelly also noted that after periods of outperformance, as in the past decade, returns from 60-40 decline.

“You have to have the discipline to add an international portfolio because we think in the long run that’s going to give you better returns,” Kelly said. “Look at the alternatives too – things like infrastructure, transport, some real estate areas. , if you can find the right manager.”

Whalen, as chief investment officer of fixed-income giant TCW, argued for bonds regardless of the economic context here.

If the Fed manages to avoid a recession, he said, “your investment-grade corporate bond fund will probably return you plus or minus 5 percent. It’s not bad.”

Click here for an in-depth analysis of the latest stock market news and events on stock price movement

Read the latest financial and business news from Yahoo Finance