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The latest reason making stock investors nervous: an “inverted” yield curve. Usually, the yield on longer-term bonds is higher than that of shorter-term bills, i.e., bond investors anticipate inflation in the future and want to be compensated for it. But if bond investors don’t foresee inflation down-the-road, it suggests they think a period of slow growth is on the horizon, possibly even a recession.
In December 2011, Congress passed the “Budget Control Act of 2011” which set spending limits for our country’s discretionary spending (i.e., not Social Security, not Medicare, not Medicaid) for the nine fiscal years of 2013-2021. Last week the House voted to ignore those spending caps (the Senate will vote on the legislation this week) and increase our nation’s discretionary spending by $171 billion in FY 2020 and $153 billion in FY 2021, the 5th time Congress has taken such action since January 2013.
It was an “old movie” that long-time stock investors have seen before: the chair of the nation’s central bank calmed the fears of skittish investors and all but guaranteed that a rate cut would occur in the coming weeks, causing stocks to surge. Alan Greenspan, Fed Chair from 1987-2006, did it so often it became known as the “Greenspan Put,” i.e., whenever a financial crisis arose, the Fed would come to the rescue by lowering interest rates.
Here’s what Wall Street was anticipating last Friday: the June 2019 jobs report would show “weak” hiring by US employers, clearing the deck for the Federal Reserve to begin an “aggressive” series of interest rate cuts as soon as its next scheduled meeting that will take place 3 weeks from now. Instead, the +224,000 new jobs that were created last month represented a much stronger number than expected, suggesting that a slowdown to the nation’s 10-year old economic expansion may not be imminent after all.
Last week’s press conference following the Fed’s two-day meeting presented Chairman Jerome Powell, on the job for less than 17 months, with a significant challenge – how to describe the U.S. economy in an optimistic light, but at the same time firmly communicate the central bank’s willingness to come to the rescue should aid be needed. Powell, the first Fed Chair in more than 30 years not to hold a Ph.D. degree in economics, delivered a “dovish” tone that indicates the Fed will “act as appropriate to sustain the (nation’s) expansion” (source: Federal Reserve).