The stock and bond markets were cold at first after the Federal Reserve’s “hawkish” 50 basis point cut, if there is such a thing. But on Thursday morning, people are feeling hopeful again.
Managing director for global macro at TS Lombard, Dario Perkins, says he never doubted Fed Chair Jerome Powell’s ability to sell a 0.5 percentage point rate cut as more of a victory lap in the fight against inflation than a sign that the U.S. economy was about to fall apart.
It’s important to remember that the monetary conditions we have now were put in place in a macro environment that is very different from what we have now. Inflation was at its highest level in 50 years, the job market was wildly unbalanced, and central banks were afraid of going through another crisis like the one in the 1970s. All of those trends had completely turned around, so it was clear that Fed officials would be able to explain a 50bps cut without worrying markets or making people feel too scared, he said.
He also says that the fact that the U.S. doesn’t need “emergency levels of monetary squeeze” anymore should be good news for risky investments.
He says that the business and market are now back to where they were in 1995. The central bank cut interest rates back to zero after a period of deliberately low policy, he said. “Not only was it the textbook example of the soft landing the Fed is hoping to achieve today, but it was also a midcourse “recalibration” in monetary policy—rather than a full monetary reversal.”
Perkins doesn’t say there won’t be a recession, but he says it will be mild because there aren’t any big financial problems and the government is supporting the economy with money. “We believe that investors are wrong about how strong the U.S. economy is, and even if there is a recession, it will probably be very mild compared to past ones,” he says.
As Perkins puts it, the bond market is pricing in too much loosening of money. “We see a secular bond bear market,” he says. “This will show up in the 2020s as higher lows and higher highs in yields, even though monetary policy has veered off course in the short term.”
He still has good things to say about the stock market. He has previously come up with his own recession indicator, which he has cleverly named the “Perkins rule.” It says that a drop in employment, not a steady rise in the jobless rate, is the sign of a recession.
He says that people who want to buy should only sell stocks when payrolls go down. “Remember, you don’t need to be able to predict recession to trade stocks; you just need to be able to spot the signs of a recession once they appear,” he says. “Because investors trust the Fed put, the stock market always gives you a chance to sell risky assets before it’s too late.”
