According to the Wall Street Journal, Chicago Fed President Charles Evans said at the Credit Suisse Asian Investment Conference in Hong Kong that he does not foresee the Federal Reserve increasing its benchmark interest rate until 2020, which could benefit the Dow Jones in the long run.
Chicago Fed Rate Forecast Should Help Dow Recover
While Evans remained reluctant to provide a conclusive comment on whether the Fed will maintain its rate considering various factors that may affect the economy of the U.S., the Fed president said that the U.S. economy is currently in a strong position.
The Dow is reeling from a rough week. | Source: Yahoo Finance
Fundamentals in the U.S. market are strong, the economy is in an ideal position to grow, and the Fed is unlikely to raise its rate this year; those are three factors that could fuel the momentum of the Dow Jones despite its recent slip.
Crucial Elements for the Dow: Strong Economy + No Fed Rate Hike
Several strategists have speculated that the Fed has decided to remain with its current benchmark interest rate due to the slowdown of the global economy.
The inversion of the Treasury yield for the first time in 12 years triggered by the concerns of investors towards a potential global economic slump led the Dow Jones to decline, recording a drop of 596 points in just five days.
If the stagnation of the global economy is the leading cause of the recent decline in the Dow Jones and the U.S. stock market, then the trade deal with China may be insufficient to change the sentiment of investors, considering that the progress of the trade deal is most likely priced into the markets.
But, Chicago Fed President Charles Evans stated that the fundamentals for growth in the U.S. are secure even if the U.S. economic growth falls in the medium-term.
He said:
“The fundamentals for growth in the U.S. remain good. If the economy performs as I expect, in 2019 we should see growth falling but still being close to trend; continued healthy labor markets; and inflation consistent with our 2% target.”
Moreover, Evans said that he is not eliminating the possibility of loosening policies should the economy demonstrate signs of stagnation.
“If activity softens more than expected or if inflation and inflation expectations run too low, then policy may have to be left on hold—or perhaps even loosened—to provide the appropriate accommodation to obtain our objectives. As we often say, policy will be data dependent,” Evans said.
Currently, the fear regarding the slowdown of the global economy combined with various geopolitical risks including the world’s largest economies are said to be negatively affecting major stock markets.
The U.S. is not immune from the performance of the global economy, but it can perform strongly independent of the global sentiment if the factors come together.
Hence, with the Federal Reserve unlikely to initiate a major change in its monetary policy in the short-term, the Dow may find relief in the upcoming weeks.
“It’s a good time to stop, pause, look and see how things are going to progress and be cautious,” Evans added.
US Market Bolstered by Strong Labor Data
Earlier, Fed Chairman Jerome Powell reportedly said that the labor participation has increased, which was unexpected by many analysts.
“The performance of labor-force participation over the last three or four years has been an upside surprise that most people didn’t see coming,” Powell said.
The rising wage growth and labor force could be considered as signals of decent economic growth, and as long as the economy remains unaffected by several key variables, the U.S. market may find itself in an ideal position to recover.