Investors Prep for High-Stakes Fed Move After Encouraging Data
Recent economic data has investors increasingly optimistic that the long-awaited "soft landing" scenario could play out, with inflation cooling without causing a severe recession. This has set the stage for a pivotal decision from the Federal Reserve in the coming weeks on whether to begin easing monetary policy.
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The Data Deluge
A slew of economic releases over the past week showed promising signs for a soft landing outcome. Inflation data revealed consumer prices rising at their slowest annual pace since early 2021. Consumer spending remained robust, while layoffs held close to long-term trends, assuaging fears of a employment market collapse.
"This week's jam-packed data calendar delivered mostly good news. Inflation was generally tepid, and activity still looks healthy," said Michael Gapen, head of economics at Bank of America Securities. "The recent data flow is consistent with our soft-landing forecast."
Market Repricing for Rate Cuts
The improving economic backdrop has markets rapidly repricing for interest rate cuts by the Fed as soon as next month. As of Friday, traders were pricing in around a 76% chance of a 25 basis point rate reduction at the September 19-20 FOMC meeting, according to CME Group data. Just a week ago, markets anticipated a more aggressive 50 basis point cut was on the table.
Technology and other growth stocks have ripped higher, leading the market rebound over the past week in anticipation of an imminent policy pivot by the Fed. However, much may hinge on signals from Fed Chair Jerome Powell at the annual Jackson Hole symposium on August 25th.
All Eyes on Jackson Hole
Powell's highly anticipated speech next Friday will be closely parsed for any hints on whether recent data has materially shifted the Fed's outlook on the need for further rate hikes. While economists expect Powell to reiterate the Fed's data-dependent approach, any deviation toward a more hawkish or dovish stance could roil markets.
"The easiest thing for Chair Powell to do would be to repeat his message from July," said Gapen. "An evolution of the July FOMC language would suggest the committee is 'very close' or 'close' to the point where easing is likely to occur."
What It Means for Investors
With so much riding on the upcoming data prints and policy decisions, investors should prepare their portfolios for potentially volatile market swings in the weeks ahead. Here are some key considerations:
Be Ready for Volatility
Have a plan for different rate scenarios and how various asset classes may react to hawkish, dovish or neutral policy surprises. Avoid being overly committed to any single outcome before the facts are known.
Consider Taking Profits
With markets already pricing in rate cuts, much of the good news may be reflected in asset prices. Trimming some holdings that have run up could make sense ahead of the Fed decision.
Focus on Data Dependency
This week's inflation, spending and employment reports reinforced easing expectations, but be ready to adjust if future data surprises. Powell's Jackson Hole language will provide clues on if the recent figures altered the Fed's stance.
Look Past Short-Term Moves
While positioning for September, keep the bigger picture in mind. The Fed may just be pausing hikes, not necessarily entering a prolonged easing cycle yet depending on how conditions evolve.
Maintain Some Defensive Positioning
If concerned about recession risks, look for defensive equity sectors, bonds, cash, alternatives or other strategies to reduce overall portfolio volatility around these pivotal events.
The main point is to make modest portfolio adjustments suitable to your individual risk profile, rather than trying to make significant bets before the Fed's true intentions become clear. Staying flexible and data-dependent, just like the Fed itself, will likely be the wisest policy amid the high-stakes lead up to the September decision.
THIS IS PRESENTATION YOU NEED TO WATCH NEXT
CNBC's 'Prophet' issues urgent Fed warning
In March 2022, the Federal Reserve raised interest rates for the first time in five years.
It triggered a brutal bear market that wiped out $9 trillion of American wealth... and slashed the average investor's portfolio nearly in half.
Now, according to the man whom CNBC nicknamed 'The Prophet'...
The Fed's next move is about to have a similar ripple effect on ordinary folks across America.
This event could dictate the next decade of every American's financial life, and it's critical that you take steps now to prepare.
Regards,
Kelly Brown
Senior Researcher, Stansberry Research
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