Transcript: Fed signals it’s not afraid to act to bolster U.S. economy
Dustin Reid of Mackenzie Investments says market responded well to September’s unusually large half-point rate cut
- Featuring: Dustin Reid
- October 8, 2024 October 8, 2024
- 13:55
- From: Mackenzie Investments
iStockphoto/Marharyta-Marko
Dustin Reid
Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re asking what’s next for the Fed, with Dustin Reid, vice-president and chief strategist, fixed income with the fixed-income team at Mackenzie Investments. We talked about that big half-point rate cut in September, and we started by asking how the market reacted to the start of the easing cycle.
Dustin Reid (DR): The market going into the meeting was not fully priced for either of the likely two outcomes, and that’s rare. Usually, the market is what I would call fully priced, or effectively fully priced. The market went into the meeting at about 40 basis points, and the two main outcomes were a cut of 25 or a cut of 50. So it depends on how you look at it, there was going to be either a miss on the downside or a miss on the upside. We’ve seen yields broadly higher since the announcement. And we’ve seen risk do relatively well and equities [move] higher. Credit spreads have tightened, that sort of thing. So, with the 50 basis points, I would say markets are performing as expected, but it was a bit of an unexpected, ‘What are we going to get’ because of the pricing in this particular case.
The risk of growing unemployment
DR: When it comes to the labour market for the Fed, I think it looks at a number of different things. Close to or at the top of the Fed’s dashboard for the labour market is what a lot of people refer to as the Beveridge ratio – the percentage of job openings divided by the unemployment rate. Going into the pandemic— kind of the Goldilocks economy of 2019 — that Beveridge ratio was running between 1.1 and 1.3. So, you had, let’s call it, 1.2 jobs available for every person that was looking for a job. After the pandemic, that ratio went all the way up to 2.0 and in the last year or so, it’s fallen significantly, and we’ve kind of come all the way back from 2.0 to 1.2, 1.1 as a ratio. We’ve actually seen a pretty significant deterioration in the labour market by the Beveridge ratio. If that ratio continues to fall, that is going to be a problem for the Fed, and could suggest that 50-basis-point increments, in terms of additional easing, could be the base case, as opposed to 25s. Within the data itself, I mean, obviously the non-farm payroll numbers and the unemployment rate are important. Beyond that, the JOLTS [Job Openings and Labor Turnover Survey] data is important. I would be looking at are temporary workers continuing to be hired, private versus public jobs, the hiring rate, the quits rate, both for the overall economy as well for the private sector. Those types of things, I think, are what the Fed are going to be looking at in terms of the health of the labour market. They’ll probably get a lot more granular than what I’m suggesting now. But those five or six different things are things that investors can take a look at.
Chances of a soft landing for the economy
DR: One of the things I think we did learn, to a point, from September is that it appears that the Fed is willing to act a little more aggressively if it needs to. And, maybe part B to that, Powell is able to get a consensus when he when he really needs to. And that should help the probabilities around a soft landing versus a harder landing or a recession. Just from an economics perspective, that has to mean that there’s a higher probability of sticking the soft landing. Not that it means it will stick, but the probability around sticking the soft landing has to be higher if that’s going to be the Fed’s reaction function.
And finally, the main takeaway from the Fed’s most recent announcement
DR: I think in many ways, the bottom line for investors from the Fed’s meeting is that the Fed seems to be signaling that if push comes to shove, it will be there, it will not hold back in terms of maybe doing a little bit more accommodation, providing a little bit more liquidity to the economy. And if the data turns, the Fed is probably ready to act, as opposed to hold back. I think the Fed is probably comfortable moving towards what it views as neutral, which is neither providing accommodation nor being restrictive in terms of rates with respect to the economy. And I think that’s generally good for investors. There are many other things that I think are drivers for investors, whether it’s the fiscal story or geopolitics or elections or valuations or overseas flows. There’s many, many things. But from a monetary rates perspective, it doesn’t look like this Fed wants to get in the way of preventing easy financial conditions. So, I think it’s a relatively good environment for investors here unless things really fall apart quite quickly and the Fed decides to get away from its most recent playbook that I think it adopted in 2020.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Dustin Reid of Mackenzie Investments. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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