Economic Insights on Fed's Recent Moves | Episode 129 | 05-01-2024

In this episode of "Markets with Megan," Megan Horneman, Chief Investment Officer at Verdence Capital Advisors, discusses the Federal Reserve's recent announcements and their implications for the financial markets. Recorded on May 1, 2024, the podcast provides an in-depth look at the Fed's decision to maintain interest rates and adjust its balance sheet reduction strategy.

Megan evaluates the economic data released earlier, including GDP and ISM reports, to forecast potential market reactions and future economic trends. Her analysis helps decipher the Fed's actions and their expected impact on both short-term market movements and long-term investment strategies.

This episode is essential for anyone interested in understanding the intricacies of monetary policy and its effects on various investment horizons. Verdence Capital Advisors remains committed to offering clear, insightful, and unbiased financial guidance.

Tune in to future episodes to better understand the current economic landscape and what it might mean for your financial planning and investments.

So anyone that was looking for any fireworks out of the Federal Reserve today were quite disappointed with this the release of the statement and then the press conference. It's Wednesday, may 1st. I'm Megan Horneman, the Chief Investment Officer with Verdence Capital Advisors, coming to you today with our regular segment of Markets with Megan. There was a lot of economic data out this morning, but we're going to focus on the Federal Reserve and what came out of their May meeting. They left rates unchanged. That was widely expected. They are going to slow the reduction in their balance sheet Again, that was widely expected. We knew that this would eventually happen. There's a lot of nuances with what they're doing with their balance sheet, but they had to start slowing the pace of that reduction of balance sheet at some point so that they don't threaten the liquidity in the system. But what is surprising is that they're slowing it on the treasury side much more than they had previously and more than was anticipated. And they left mortgage-backed securities unchanged. In their statement that they released they mentioned that the lack of further progress on inflation that was known that they would probably address that because of the most recent higher inflation readings. They did mention there's no rate cuts until inflation moves sustainably towards 2%. So if anybody thought they were going to change that 2% target that they've stuck with for many, many years, it did not change. Now let's get into the press conference Again.

I'm not quite sure why I continue to tune into these, because it's the same thing he did mention. It's unlikely that the next move would be a hike that he did mention. The consumer's been strong, the labor market's been strong, but yet showing some signs of weakness. What do we make of this? Well, first of all, the equity market loves it and I've often said, whether it's politics or Federal Reserve or any of the economic data, the equity markets like it when they're not surprised with anything. So there was no mention of rate hikes in his statement and this is something that there was a slight expectation that he might come in open up the door that they may be able to hike rates.

He continues to say they're data dependent. He says it all the time. It doesn't mean anything because obviously he's not looking at the most recent data. That's what concerns us the less treasuries hitting the market because they're going to slow, at a lesser pace. That's causing treasury yields to come down. That's also fueling this rally. So what do we make of this? What do we think going forward?

We are frightened I have to say it's a harsh word that the Fed is too busy patting themselves on the back with what they've done to bring inflation from the highs after the pandemic to where we are today. That they're not focusing on what we're seeing in most recent data. We never look at a one month as a trend, but we've now had three months of surprising inflation data and slower growth. Some of this data is going in the complete opposite way. I'll make an example. We talked to you last week about the GDP report as well as the cost index. We got more information this week about inflation being higher in the first quarter. We also got the ISM report this morning. That shows that the economy is basically still in contraction territory from an ISM manufacturing perspective, but the prices paid component is now above 60. That is for those who don't understand what that is. That's high. That is an inflationary number. So I'm concerned that they're way too busy, way too focused on trying to satisfy these markets and they're not looking at the data that we're looking at on a daily basis.

We think that the Fed's going to have their hands tied. They continue to come out with these dovish press conferences and dovish rhetoric and this market's going to continue to go higher and it's just refueling inflation. He was asked in the press conference about the easing of financial conditions that started last year and this had a lot to do with him making that pivot of hey, we're going to cut all these rates this year and we saw this resurgence in growth. Well, guess what comes with a resurgence in growth? A resurgence in inflation. And they refused to see this.

So we're sticking with our recommendation from the equity perspective neutral, holding onto our cash. The cash isn't going anywhere. It's going to be earning you that 5% and we don't see that changing really for the remainder of this year. We're still in the camp that the economy may be able to slow enough that they can get comfortable to cut rates at some point at the end of this year. But I got to tell you my conviction in that is fading because of what they're doing now. They're not doing anything to slow down this inflation and that is a bit concerning to us. That's all we have today. If you have any questions, comments or feedback, please feel free to reach out to podcast at verdence dot com. Thank you.