Risk of a Recession Has Some Wondering about the Fed

Federal Reserve

With the Fed still forecasting at least one rate hike in 2019, if not two, and no one really talking much about a rate cut, this does not suggest that things may get unmanageable.

One of the questions that people are asking, in the midst of the economic slowdown that we’re seeing, is whether the Federal Reserve has the ammunition to manage this acceptably if things get worse.

This is not one of the first questions that would tend to come to mind right now, with everything else going on, and with both the stock market and their underlying businesses still looking pretty good. However, the economic numbers that we’re seeing still present some concern, as the business cycle tide is looking like it may take a downturn soon, at least from looking at the economic data.

When we look to project the future of the economy, business, and the stock market, we need to be at least be keeping our eye on economic data, as it generally does have a say at some point. Whether that means just a slowing down of a bull market or seeing us plunge into a recession is another matter, and we need to keep our ears close to the ground to be aware of actual trend reversals as they unfold.

While doing this, we will explore the potential effects of various degrees of slowdown, and one of the things we may need to wonder about is how effective the Fed may be at chipping in to reduce the effects of this slowdown upon the economy, and in turn, upon the value of stocks.

There are some who worry that the Fed has already used up some bullets and there may not be enough left in the gun to handle things if the economy continues to slide. Rates are indeed historically low, and there’s also only so much quantitative easing that we can use to also stimulate the economy.

Rates do work to a good degree though, and can handle some pretty big slowdowns. This is of course limited to more modest events, and things like the housing crash of 2007 can be of too big of a magnitude to do much more than dull the pain.

No Action Has Been Pretty Effective, Action Would Help Us Even More

One of the things worth noting though is the effect of just laying off during this most recent meeting has had. It’s no secret that markets responded positively to this news, and this is at least part of the reason why we’ve moved up since Christmas time.

This all started right around the time when the Fed told us they would be not looking to push things further right now, and seeing them display a more patient attitude continues to drive stocks up.

If non-action can stimulate a market this much, taking the opposite action and actually stimulating things by lowering interest rates will do even more. If leaving rates unchanged for 2 months is enough to control the effect of the slowdown at the level it is now, lowering rates modestly would be able to handle quite a bit more of it.

As for how many bullets they have to use, the rate is now 2.7%, and we can take this down to near zero, as we did between 2008-2015, that does leave them with quite a few bullets actually. This rate got raised up when the economy not only recovered but started to heat up too much, and there’s quite a bit of difference in over 2 and a half percentage points to be sure.

It’s not that the Fed isn’t on the case though, and their efforts have been on balance on the expansionist side, with the amount of quantitative easing they have done. Other central banks have ramped this up as well, and seeing the economies of other countries being worked on this way does positively affect American business as well.

Seeing all this happen and still seeing the slowdown persist does worry some people though, although we must remember that rate moves are the big guns here and it’s until we see them misfiring, there isn’t a whole lot to worry about as far as their being effective or not.

We need to keep a close eye on how the numbers are changing, but we still can feel pretty secure that the Fed can come to our rescue as long as things don’t deteriorate too much. There isn’t a good reason to think that things will exceed that point anytime soon.

Slow Moving Slowdowns Are Easier to Handle

This slowdown, so far, has been rather slow moving, and this is exactly the kind of slowdown you want if you’re trying to manage it well. The bigger ones leave no doubt as to action being needed, not the ones that still have some in the Fed still wanting to pull on the reins. The Fed might have shown restraint the last meeting, but they are still on the edge of their seats and poised to throw in some more interest hikes, which means the expectations are that we won’t really be slowing down enough to have them not do so.

Situations change though, and in another year from now this story could indeed be told differently. If we get the U.S.-China trade deal done though, this should serve to meaningfully impact the drooping sales results that have some of us a little worried.

This is all an event in progress, but not one that we’ve seen any sort of significant market shocks with, nor is very much on the horizon of real possibilities yet, save for perhaps a failure of these trade talks and an escalation of the battle that will probably result if this happens.

The Fed still very much reigns upon our current economic client, and there’s no good reason to think that things may deteriorate in the near future to a point where they would actually lose control and be unable to prevent a real bear market, not the one we just recovered from.

Ken Stephens

Chief Editor, MarketReview.com