Fed Isn’t Cutting Rates Now, But Headwinds Ahead Could Prompt Cuts

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The Federal Reserve met this week and decided not to cut interest rates, as expected. But several economic headwinds are emerging and, should they persist, the Fed may be forced to cut rates, an outcome that would delight stock investors.

All three major indexes rose Wednesday as positive economic data rolled in and the market digested the minimal impact on the U.S. economy from China’s unfortunate coronavirus. The 10-year treasury yield did fall slightly to 1.618%, as the probability of a 2020 rate cut rose to 15% Wednesday from 12% Tuesday.

Stocks have been in rally mode over the past several months, pushing earnings multiples to what some call slightly “excessively” high levels, as GDP growth has re-accelerated and the Fed has made it clear it will cut rates if need be. The S&P 500 is up 8.2% in the past 3 months.

Here are a few economic headwinds that could further the case for that additional rate cut soon:

“The durable goods data that came out — even if you net out the Boeing effect — the durable goods data was much weaker than what was expected and I think that the Fed will become increasingly concerned if it looks like the United States is not going to pull out of the industrial recession that it’s been in for several quarters now,” said Danielle DiMartino Booth, former adviser to the president of the Dallas Fed and Founder of Quill Intelligence.

Durable goods orders — orders of goods purchased not daily, but rather sporadically — rose 2.4% in December month-over-month. This was weaker than expected, even when excluding Boeing’s negative impact on the total number. Manufacturing activity has been declining on a year-over-year basis since August of 2019, serving as a drag on an overall satisfactory economic growth picture in the U.S.

Also, “We’re already seeing a rising number of bankruptcies in the energy space, which means job losses in Texas,” DiMartino said. “If we see continued increases and continuing jobless claims, this will get the Fed’s attention and this will put rate cuts very much more back on the table.”

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