If the Fed pauses, will that revive risk assets? Tom Nelson and Miles Sampson of Franklin Templeton Investment Solutions weigh in on the investment implications of the latest US central bank actions.
Fed pause amidst economic uncertainty?
The Federal Reserve (Fed) hiked interest rates 25 basis points at its May policy meeting, taking the upper end of its target to 5.25%. The Fed also indicated that it may pause rate hikes as it observes how the economy is reacting to its ongoing policy moves. We agree with the Fed that the outlook is uncertain: weak manufacturing, regional bank turmoil and declining corporate profitability are coinciding with a resilient labor market and consumer spending.
Our view is that there is a high probability that US growth will continue to weaken and enter recession later this year. We continue to rely on leading economic indicators, where the growth rate is at a negative level that has historically coincided with US recessions.
Exhibit 1: Leading Economic Indicators at Recessionary Levels (right click to enlarge image)