Economics Weekly: Preemptive "Insurance Cut" or Reactively Chasing the Economy—It Matters for Equities

Friday, June 28, 2019

"It's why research, kind of shows this, it's wise to react for example, to prevent a weakening from turning into a prolonged weakening, in other words, sort of an ounce of prevention is worth a pound of cure." [emphasis added]
– Chairman Powell June 19, 2019

"Well, I think—I think in a world of lower interest rates the research seems to show—and I think this is fairly widely accepted—that it's better to act preemptively. As a general matter, I think most central banks would want to act preemptively and not let a downturn gather steam, in a sense, the thought being an ounce of prevention is worth a pound of cure." [emphasis added]
– Chairman Powell June 25, 2019

There would seem to be little doubt by now about the Fed's desire to cut interest rates at the next FOMC meeting, July 30-31. This means that there are really only two questions around the expected easing: 1) Will the Fed decide to cut by 25 basis points or will it choose to do a more robust 50 basis points? And 2) should this be viewed as an insurance rate cut in order to help stabilize growth and inflationary expectations or is the Fed behind the curve and reactively trying to accommodate a bond market with a seemingly much more dire view of the economic situation? In this week's Economics Weekly we discuss both of these questions, as they have important implications for equity investors.

For a copy of this report or to subscribe to the Economics Weekly or Economic Indicators reports, please contact your William Blair representative.

Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.

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