Investing.com – The Fed may be lagging behind on rate cuts, but concerns about a U.S. recession are “overblown,” Macquarie says, because the central bank has plenty of policy options to change course with limited damage at a time when economic fundamentals remain strong.
“We also believe that nervousness about the easing of the US economic downturn is overdone,” Macquarie said in a recent note following the recent economic fears.
A series of weaker reports, including the July employment report, sparked concerns that the US could be heading for a recession, leading many to call for sharp interest rate cuts by the US Federal Reserve.
Following economic data, including last week’s better-than-feared unemployment figures, fears of a recession have subsided.
While Macquarie acknowledges that the U.S. economy is slowing and the Fed is lagging, it believes the rally is irrelevant because “strong fundamentals, excess capital, immediate revaluations and an immense policy toolkit allow for a quick turnaround with limited damage.”
Macquarie’s outlook is similar to that of Fed Chairman Jerome Powell, who previously mentioned that the central bank would be ready to act if weakness in the labor market unexpectedly accelerates.
“If the labor market weakens unexpectedly or inflation falls faster than expected, we are prepared to respond. Policy is well positioned to deal with the risks and uncertainties we face in pursuing both sides of our dual mandate,” Powell said at the FOMC press conference on July 31.
The current backdrop reflects a “twilight of no recessions but also no strong recoveries, complemented by lower interest rates and higher liquidity,” Macquarie said, noting that this is fertile ground for speculation across all asset classes.
However, in this “twilight of plenty,” investors would need to opt for equity selection rather than factor and style strategies, as the latter “would likely fail due to a deterioration in the economy and capital markets,” Macquarie added.
