Will The Market Test The Fed? Likely.

June 19,  5:00 pm EST

The Fed held the line on rates today, passing up an opportunity to surprise markets with a cut.  The economy seems to be in position to easily absorb it, with soft inflation.

Not surprisingly, they did make plenty of efforts to massage market sentiment.  They stayed on message that they are prepared to act to sustain the economic expansion.  And half of the Fed Presidents now see at least a cut by the end of the year.

What is clear, coming from the Fed Chair’s press conference, is that this is all about the China trade deal.  If it drags out, sentiment continues to erode.  When sentiment erodes, the economic momentum will erode.  If that’s the case, they will be reactive, with stimulus (rate cuts and/or slowing the runoff of Treasuries on the Fed balance sheet).

On the other hand, if we get a deal on trade, the Fed is off the hook — no rate cut.

And they seem to be comfortable, at the moment, holding their fire as long as economic conditions are still holding solid.

The question now is, will they be tested?  Sure a deterioration in sentiment can show up with consumer activity or business confidence. But more likely/ more immediately it would be in financial markets.

With stocks just a percent off of highs, they aren’t being tested at the moment.  However, a sharp move lower in stocks and I suspect we would see the Fed step in, and quickly.  The other spot that could test them is the yield curve.

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