Catalysts hosts Seana Smith and Madison Mills sit down with S&P Global Ratings Global chief economist Paul Gruenwald and Touchstone Investments global market strategist Crit Thomas to discuss how the market could react to Wednesday’s expected interest rate cut and what investors could anticipate going forward.
Thomas tells Yahoo Finance he expects the Federal Reserve to indicate it will continue to do 25-basis-point cuts for the remainder of 2024, which he says is “pretty much consensus” so it shouldn’t be “a big surprise for the markets.”
Gruenwald explains that following Fed Chair Jerome Powell’s comments at the Jackson Hole Economic Symposium, the Fed has shifted its focus and “concluded that inflation is under control” and “they’re going to pay more attention to full employment.”
For more expert insight and the latest market action, click here to watch this full episode of Catalysts.
This post was written by Naomi Buchanan.
Video Transcript
Heading into tomorrow, if you can help prepare us in our audience for the market reaction, not just to the 25 or 50 question, but also to the commentary that we might get commentary.
Yeah, definitely.
I mean, and I, I believe that they’re going to lay out a case that they will continue to do 25 basis point cuts through the remainder of the year.
Um And I think that’s pretty much consensus.
So I don’t think that’s gonna be a big surprise for the markets.
One thing that, that I’ve liked that I’m seeing in the markets is that uh that we’re seeing some broadening in terms of participation.
Um So you move down in market cap, you’re starting to see, um uh see some things pick up.
Uh We’re looking out to 2025 in terms of earnings where uh things could start to turn around for small caps and mid caps.
Um, you know, 11 thing, uh one area of concern for me is with a gradual uh easing in terms of rate cuts.
I mean, how much further can say mortgage rates go down, um which is, um, you know, an important part, uh, of the economy.
Um, it’s acted very strange in a, in a rate hiking cycle.
Now we’re, we’re, we’re gonna pull down rates but, um, uh, mortgage rates have already come down considerably.
Uh, and I think that there’s a lot of people anticipating that, you know, say mortgage rates get down below 6% or something that could kick off the housing.
But I, I don’t know.
Do you get even to 6%?
So you don’t think we will?
I, I don’t know.
Um, I mean, think about, you know, the landing spot for fed funds, they’re thinking maybe 3, 3.5 in normal times, uh, a spread, uh, of mortgage rates to fed funds, maybe 300 basis points, you know, so they, they get you to, to six and maybe even a little bit higher.
It makes me wonder too, Paul, you’re, you’re touching on this idea of kind of the fed raising rates not really doing what it was kind of meant to do.
Right.
It ended up having people locked into their homes making tons of money on their cash.
That may be fueled inflation to a degree.
If raising interest rates did not do what it was supposed to do, then why are we making such a big deal about cutting?
Is it, is it gonna do much?
Well, the asset price channel didn’t work usually when you rates, you’re counting at a higher rate.
So asset prices go down and that didn’t happen this cycle, right.
Housing prices to continue to go up and you just showed some affordability earlier, lower rates are gonna help.
But it’s really the price effect that’s keeping people locked out of the market and then we’ve got to get supply uh going.
But there’s been some weird stuff.
Right.
Going on with rates and asset prices.
It’s gonna be asymmetric because as we go and cut rates, people aren’t gonna be refinancing because we’re already locked in.
So that particular channels gonna be there.
We may get, I agree, we may get some more people coming into the market, but I’m not sure six for the mortgage rate does it right.
It’s, it’s more of a price effect, I think than a rate effect and that’s gonna take some time.
And Paul Jazeeri in on the latest developments that we’re getting on inflation.
Obviously, we’ve seen substantial improvement.
There has been some risks or, or, or, or the thought out there that we could see a bit of a bump higher here just depending on what the fed’s next action or actions may be here to come are going to look the Fed’s battle with inflation.
Is that totally in the rearview mirror?
What’s your view on this?
Largely?
I mean, Jackson Hole, I think was a big event where Charo Powell came out and said essentially we’re going to be, you know, pivoting from focusing on our inflation mandate to focusing more on our full employment mandate.
That doesn’t mean they’re not looking at it, but it means they’re comfortable with the inflation dynamics and the rate cuts going forward are going to be protecting the downside.
And again, it’s all about the labor market.
So the fed seems to have concluded that inflation is under control, they’re gonna pay more attention to the, uh, the full employment.
And you think that too?
Yeah.
Yeah.
Yeah, I think that’s right.
And Craig, I, I can’t let you go because we are nearing the end of our time together.
Unfortunately, guys, but I can’t let you go without asking about why you’re underweight large cap growth.
That seems like a contrarian call to me in this environment.
Well, um there’s a tremendous amount of stock specific risk within the growth index and I’m a strategist.
So I have to look at things from an index standpoint.
I don’t wanna take all that stock specific risk.
Um, and also the, the leaders, you know, the, the, the mag seven or whatever you wanna call it, they’ve had a tremendous run.
So I, I think that, that, that risk has increased dramatically and I also anticipate as the fed cuts rates that, that it will lead to, to more broader participation as well.
Is that a positive for stocks?
Is that I think so, even if it means that large cap comes down a little bit, we’ll take that as a yes to our listeners.
All right.
Thank you so much.
I really appreciate it.
Thank you and thank you Paul for joining us in the studio.
I really appreciate you both.