As we sit here in mid-July, it is difficult to predict with any certainty where the economy is headed as we close out the year and move into 2020. The futures market currently seems all but certain that a Fed rate cut of 25 basis points at month-end is a given (with the chance of a decrease being on the order of 50 basis points), while at the same time a few of the Fed policymakers have expressed sentiments that continue to harbor the potential for an increase in their target range, which currently sits at 2.25% – 2.5%.
For a historical context, before the last recession the central bank began cutting rates from a level approximating 5.25%. Ahead of the 2001 recession, the Fed began to move on rates that at the time stood at 6.5%. The conundrum today clearly exists that Fed relief tied solely to rate cuts currently offers somewhat limited flexibility when compared to past recessions in the U.S., unless the central bank begins to tread into European-style negative rate scenarios. Historically, traditional interest rate cuts have often served as the best source of stimulus to the economy versus other unconventional (i.e. bond purchases) alternatives. Today, that avenue has narrowed given the current relative level of short-term rates.
As we move through the Summer, I’ll return with more industry-specific commentary, particularly as it relates to the shape of the yield curve, the actions (or inactions) of the Fed, and the general state of the economy. As my colleagues recently pointed out in our weekly “Austin Advisor”, it is safe to say that “uncertainty” will probably dominate the headlines in the weeks and months to come. Full employment and a lack (thus far) of traditional inflationary pressures, seem to currently be counter-balanced by uncertainty on the geopolitical front and the potential unintended consequences of ongoing trade wars. With the record economic expansion now extending beyond ten years and marking the longest such stretch in recorded history (while including what is now 105 consecutive months of job gains), the question remains: how much longer can/will this continue?
All eyes will be on the Fed meeting at the end of this month, especially as it relates to commentary about their perception of a potential deceleration of economic growth, the current level of interest rates, and what they are anticipating with regard to recessionary pressures.
July 2019 Michigan Banking Summary
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