Wall Street & White House Divided on Pace of Rate Cuts

Most of Wall Street is expecting the Fed to cut interest rates in coming days, but the question is by how much? For the most part, economists fall in one of two camps – a 25 basis-point cut or a 50 basis-point cut. But according to one White House official, half-a-point is just not going far enough. White House Economic Adviser Larry Kudlow appears to prefer to see the Fed cut interest rates by 75 basis points when they meet for a two-day meeting next week, telling Fox Business:

“I will say the market is expecting three 25-basis point rate cuts between now and year-end…my own personal view and the Fed is independent…I would just say the sooner the better…I think that’s the president’s view…I think the fed’s target rate should drop by 75-basis points.”

What’s Wall Street saying about the rate cut? It’s a mixed bag, with analysts suggesting either that a possible recession is looming over the economy or that it’s off to the races for the stock market once the Fed makes its expected move.

fed expectations
Source: The Wall Street Journal

Fed Thrusts Bull Economy Into the Spotlight

JPMorgan analyst Nikolaos Panigirtzoglou believes that current low market depth figures present a sell-off risk. In this scenario, just a few large buy or sell orders can skew the entire market and create a mini-bubble or a selloff, both of which no investor would be particularly happy to see right now.

According to Panigirtzoglou cited in CNBC:

“In our mind, this persistently low market depth leaves U.S. equities vulnerable from here if central banks fail to validate market expectations or U.S. recession risks resurface.”

This school of thought believes that if the Federal Reserve does not deliver an interest rate cut to stimulate investment and deepen market volumes, a massive selloff is all but inevitable. Given the relative weakness of America’s bull economy, such a selloff risks setting off a recession which would be both an economic and political problem going into the 2020 presidential campaign cycle.

Alongside JPMorgan in this group of bull market skeptics are Goldman Sachs and UBS Group, both of which have publicly stated that they think the S&P 500 is at or close to its real value with little chance of upside.

‘Bull Market Not Going Anywhere for Now’

On the other hand, an opposing school of thought believes that rumors of the bull market’s impending death are greatly exaggerated. According to Neil Dutta, head of economics at Renaissance Macro Research, the problem is that the estimates that inform market fundamentals are out of step with reality.

Retail and industrial figures have exceeded the relatively cautious estimates put forward by Wall Street over the past two months, and this to him is a sign that it is analysts who are misreading economic data. Along with other bullish analysts, he believes that shallow market depth does not necessarily imply oncoming doom but could mean that investors are waiting on the sidelines with hefty war chests ahead of the Fed’s expected rate cut.

RBC Capital Markets chief U.S. economist Tom Porcelli encapsulated this optimism in a report that was recently cited in Bloomberg:

“Right now the Fed is cutting when growth prospects are nowhere near weak and Fed funds is close to neutral. Risk assets should absolutely love this setup.”

What seems clear at the moment is that regardless of the bull market’s performance, Wall Street’s investment bellwethers are applying caution. We can only wait for the market’s reaction to the Fed announcement.

Wall Street & White House Divided on Pace of Rate Cuts 1
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