The Federal Reserve must pull out the bazooka if it wants to set up investors for big gains

Brian Sozzi

The market is banking on perfection from frequent President Donald Trump target and Federal Reserve Chair Jerome Powell when he delivers the latest decision on monetary policy on Wednesday.

Stocks have rocketed to fresh highs — despite ongoing trade tensions with China — on expectations the Fed will slash interest rates by 25 basis points later this week. Some of the riskiest areas of the stock market in particular — from Big Tech such as Microsoft to the Philadelphia Semiconductor Index — have been bid up this summer on the prospect for even cheaper money sloshing around the financial system.

“Markets are currently discounting 65 bp of easing by the end of 2019 and an additional 35 bp of easing by yearend 2020,” points out Goldman Sachs’ research team.

While most on Wall Street such as Goldman are bracing for a 25 basis point cut this week, there is a cohort calling for 50 basis points. “The June FOMC shifted our Fed view a lot on rates,” UBS wrote in a note last week, being among the more aggressive shops on rate cut calls. “Chair Powell clearly wants to cut rates; in public comments, he and the core of the FOMC have ignored or downplayed strong data and highlighted weak data.”

Unfortunately, for the beleaguered Powell, simply cutting interest rates will unlikely be enough to sustain the market’s newfound momentum. Sure, while Powell and his fellow Fed members don’t have a mandate to prop up stock prices it would be folly to think they aren’t closely watching asset values.

So, what is the perfect scenario for investors coming off the Fed meeting? Think Powell whipping out the bazooka from his arsenal.

“The Fed comes in with 25 basis points and maintains its active dovishness stance that they are prepared to lower rates again — that maybe telegraphing that September is in play [with a rate cut],” said Quincy Krosby, Prudential Financial chief market strategist, on Yahoo Finance’s The First Trade. “The other thing they can do is a 50 basis point cut and really surprise the market. I don’t the market reaction would be the Fed knows something we don’t know — but rather their insurance policy is intact.”

Goldman cautions that investors should temper their giddiness around the Fed. “Our U.S. economists do not believe that the current pace of growth and inflation warrant the degree of easing currently priced by markets,” Goldman writes.

Probably a wise call.

Brian Sozzi is an editor-at-large and co-host of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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