A recession on the horizon?

 

The U.S. economy is showing signs of weakness. The Citigroup Economic Surprise Index, which measures whether economic releases are beating or missing expectations, has been trending down. In addition, Chair Powell has more or less made it clear that a September rate cut is in the works, as long as the inflation data stays low. The Fed doesn’t need any further softening in the labour market to reduce interest rates. He laid out the Fed’s reaction function this way at the post-FOMC press conference:

If we were to see…inflation moving down quickly, or more or less in line with expectations, growth remains let's say reasonably strong and the labour market remains consistent with its current condition, then I would think that a rate cut could be on the table at the September meeting. If inflation were to prove sticky and we were to see higher readings from inflation, disappointing readings, we would weigh that along with the other things.

Moreover, the jobs market doesn’t need to cool any further for the Fed to cut:

I don't now think of the labour market in its current state as a likely source of significant inflationary pressures. So, I would not like to see material further cooling in the labour market.

 
Financial markets have been rattled by the prospect of weaker growth. The key questions for investors are:

• Is a rate cut too little, too late to stave off a downturn?
• Has market psychology turned and bad news is now bad news?

The full post can be found here.