David Dietze, Senior Investment Strategist at Peapack Private Wealth Management, spoke with Quartz for the latest installment of our “Smart Investing” video series.
Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity.
ANDY MILLS (AM): The FOMC meeting is underway. How big do you expect this first rate cut to be?
DAVID DIETZE (DD): No one really knows right now. Fed futures are suggesting a slight favoring of a 50-basis-point cut instead of a 25-basis-point cut. But there’s such a wide dispersion in what opinions are, and that’s what makes this Federal Reserve meeting actually very historic because it’s been decades really since we’ve gone into a meeting with so much uncertainty as to what’s gonna come out of it. Usually the members of the Federal Reserve preps the investing public as to what to expect by the way they couch their remarks at various press conferences and so forth. Right now they were all across the board. So it’s gonna be very interesting.
AM: 50 basis points seems drastic though we haven’t done something like that since the financial crisis.
DD: I think the argument to do 50-basis-points is we’ve seen a tremendous reduction in inflation over the last, let’s say 24 months. And so right now, arguably inflation is moving at about 2.5% a year. While your fed funds futures are up close to 5.5%, that 3% gap is huge. Most people think it should at least be 1% lower. And so the question is do you take baby steps to get there or do you start out with a bang and move quickly? I think the reason to take more measured baby steps is because we could still see another burst of inflation. We’ve seen the economy be fairly resilient here. We still have a four-handle on unemployment. I think the reason to go big here is because we are starting to see those jobless numbers creep up. We were at about 3.5% percent unemployment. We got up to 4.3, now we’re at 4.2. Many economists say once it makes a half a point move, it tends to go big and to try and get ahead of a slow down, which would unnecessarily hurt so many people in the labor force because your monetary policy is so arguably unnecessarily restrictive.
AM: Do you think investors should hope for a big move like this with 50 basis points?
DD: I think on balance, the lower interest rates, the better for investors. That raises the present value of everything. That reduces the cost for CapEx expenditures by corporations. It reduces the cost of big ticket items like automobiles and mortgages, of course for individuals and of course investors. People like me advising my clients every day we’re looking at, well if we invest our money into bonds, what are we gonna get? What’s the interest rate? If we invest our money into stocks, what are we gonna get? As those yields on bonds come down on balance, that tilts the proposition towards stocks, causes people to move into stocks that pushes stock prices higher. That’s good. For investors,
AM: This is a change that we’re seeing where it’s like now we’re starting a rate cut cycle. What do you expect subsequent rate cuts to be after this one And the timing of them too?
DD: Absolutely. I think the Fed Fund futures are seeing 1% of cuts by the end of the year. We will know a lot more after Wednesday because they will have the so-called dot plot, which shows what the consensus is for each meeting in terms of what the federal funds rates will end up being. I think we’re gonna see probably rate cuts through next summer, which could take us down to potentially a three-handle on the Fed Fund futures. But I think right now the expectations are, we’ve got three meetings left. We’re gonna have a full hundred points of cuts, which suggests one meeting has to have 50 basis points in order to have that 1% goal met.
AM: What would the market reaction be with a 25-basis-point cut versus a 50-point-cut?
DD: My best guess is the market would pull back, there would be a sell on the news phenomenon. Why? Because a lot of people, at least half the people, maybe more, are hoping for a bigger cut. And so the Federal Reserve is keeping monetary policy more restrictive than it should be unnecessarily. And so people sell stocks. Remember we are close to all-time highs. The Dow just set a record yesterday. The S&P is just 70-basis-points from an all-time high. So there’s not much cushion in terms of valuations for any kind of disappointment. Now if there’s a 50-basis-point cut, what happens, I think, on balance, the market surges because it lowers that drag of interest rates across the economy makes stocks look on the margin more attractive. Now the opposite argument is why do they need to do that 50-basis-point cut? Is there something about the economy that we don’t know that’s causing them to bring out the heavy artillery to start fixing the economy? Do they have advanced word on deterioration in certain areas of the job market or the economy or overseas that we don’t yet know about and therefore we should be suspicious of their motivation. Now, on balance? I prefer the take of good news for good news in terms of lower interest rates. We have seen time and time again that many times the Federal Reserve does not really have a crystal ball anymore than the rest of us. And so for them, for people to think that’s some sort of a conspiracy that they know something we don’t know, I would bet against it. But some people will be saying that.
AM: So if they cut 50-basis-points, what do you think they know that we don’t know? What’s your guess of the suspicious thing inside the economy?
DD: Well, they may have certain, out in the hinterland, some sort of sense that layoffs are coming, that particularly low income consumers are struggling more than is generally known in terms of making their car payments in terms of being able to make their rent payments. They may have some advanced word of some large corporations preparing for layoffs, which will be very negative. Or it could be something overseas. Perhaps they have some inside knowledge as to what’s going on in China. Remember that one of the headwinds for markets in the economy here is the fact that the second largest economy, China, is back on its heels. We don’t know how bad that’s gonna get. We know that the Chinese government wants to do something, but they haven’t pulled out the heavy artillery themselves. They’ve got some big problems in their property sector if there are defaults there. How could that ripple into ultimately the rest of the global economy, including the United States? They may have more sense on that than Wall Street generally has.