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Don't Push the Button

| August 05, 2019

My son has a book called “Don’t Push the Button.” He loves it! In it, Larry has one rule, “Whatever you do, don’t push the button.” Needless to say, what does a 2-1/2-year-old want to do when he hears this – push the button of course, and he is even encouraged to do by Larry who realizes that pushing it might actually be fun (which it turns out to be!). It’s a really fun book and we read it often in our house.

Why am I talking about a kid’s book here? Well, because the parallels here are just too similar to what we saw play out in the financial and geopolitical worlds this week. As a primer, the Fed cut the Fed Funds Rate by 0.25% (25bps) this week, as was widely expected. Not a shock there, and the markets had a muted reaction to this news, having already priced in a near certainty that it would happen. However, things got a little hairier later that afternoon as Fed Chairman Jerome Powell indicated in his press conference that they would be data dependent with regard to further rate cuts, saying initially that there was no set plan for further reducing this key economic variable (as has become tradition, he later tried to backtrack a bit on this…someone really should hire him a better PR coach). Markets, which had priced in further cuts already, reacted poorly to this initial statement, quickly dropping rather precipitously. 

While not a lot of things in life are certain, I can all but assure you that President Trump was glued to the TV as the press conference played out – and he quickly picked up on Powell’s emphasis that “trade tensions” were one reason that interest rates were cut and that the wait-and-see approach that Powell signaled was waiting to see if more was going wrong (e.g. trade skirmishes were escalating). Here in lies that “button.” 

Before we continue, let’s take a step back and talk about the Fed. The Fed is supposed to be independent. It is supposed to think and act independently of any political influence, keeping its eye on its “dual mandate,” which is to "promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” If it had a button, in theory no President should be able to press that button, however badly they may wish to do so – and Trump has said in no uncertain terms that he desires to push it. He wants interest rates significantly lower, and hasn’t parsed his words in criticizing Powell for not getting there quickly enough.

I don’t think it is crossing the “don’t talk politics” line to say that Trump doesn’t like to be told that he can’t push the button. The challenge for him, unlike in the aforementioned children’s book, is that there isn’t a big shiny red button right in front of his face that he can push, even when told no. Instead, he has to get creative – and the earth hadn’t made a full rotation before he did get creative and decided to leverage the ongoing trade spat with China to effectively push that button and force Powell & Co. to further lower rates this year. It seems no coincidence to me and to many others that an escalation in tariffs was announced the very next day (Thursday), and that these tariffs go into effect in September, the same month that the Fed’s Open Market Committee (FOMC) is slated to meet again. Barring the totally unexpected, things will be worse at that time, and the Fed will be forced to consider this as they consider another rate cut.

The markets didn’t like this escalation in trade rhetoric, but they have shown an endless affection for easy monetary policy. That battle is now playing out in the markets, as investors weigh these two realities. What gets lost in the headlines is that the underlying fundamentals of the world’s best businesses have not been materially affected yet by either of these tensions, as they quickly adapt and move forward in what the data shows is an otherwise healthy economy, particularly here in the US. Weighing all of this, we remain cautiously optimistic – leaning into equities (particularly in the US), while maintaining what we see as appropriate risk measures to help our portfolios – and your long-term financial plan - should things deteriorate. In our view, even with the “worst week for the markets this year” as the headlines are quick to point out, it’s not time to hit the panic button.