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The job market made a dramatic recovery from May’s much weaker-than-expected gain of only 72,000. The June figure showed 224,000 jobs were added during the month, significantly reducing fears of a sharp slowdown in economic activity. Although manufacturing and housing indicators have shown some slowdown in the second quarter, consumer spending has remained strong as we enter the second half of the year.
Despite solid economic performance, Federal Reserve (“Fed”) officials have telegraphed that they are inclined to reduce the overnight federal funds rate when they meet at the end of July. Fed Chair Jerome Powell has stated that trade frictions and slowdowns seen in foreign economies have strengthened the case for an “insurance” cut in rates. Mr. Powell basically said that an ounce of prevention is worth a pound of cure.
The likelihood of many of these overarching issues being resolved in the short run is low. Trade negotiations, even in the best of circumstances, are extremely complicated and take time to hammer out and the resulting economic effects take even longer to materialize. On the political front, Europe remains mired in Brexit gridlock. The probable election of Boris Johnson as prime minister does raise the odds of a no-deal Brexit with unknown economic and social ramifications, both in the UK and throughout Europe.
The real question now becomes how much “insurance” does the Fed think it needs? While a 25-basis-point cut in July is almost a given, the path from there is much less clear. The economy is still showing moderate growth, unemployment remains quite low, inflation at the consumer level is not that far from the Fed’s 2% target and the stock market is at all-time highs. The Fed does not want to be seen as bending to the political winds of the day, nor does it want to be bullied by the markets into further cuts than needed. Time will tell if both the stock and bond markets have priced in more than the Fed decides to deliver.
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