The U.S. Economy is Robust, Trade Deals Abound and the Federal Reserve Stimulates?

Douglas Cote

Douglas Coté, CFA

Senior Portfolio Manager, Head of Global Perspectives

The “Phase I” China deal is in the books and it certainly was good for the United States. It commits China to recognizing and enforcing the protection of U.S. intellectual property rights, and to spending $200 billion more on U.S. goods; it addresses China’s currency manipulation and keeps most tariffs against China in place. The U.S.-Mexico-Canada Agreement (USMCA) also is a win today, with passage by the Senate benefiting U.S. manufacturing, labor and intellectual property. This will be a boon for higher paying jobs and ever more jobs, even though we are at a 50-year low in unemployment.

Fabulous news — so why is the Fed stimulating the markets by giving banks over $300 billion since September, $82 billion in January alone? This massive stimulus also effectively cut the fed funds rate near its normal 25 basis points (bp) by forcing the rate to the lower end of its 1.50–1.75% target range. Coincident with the timing of this Fed stimulus, a lot of this cash has ended up in the stock market. In 4Q19 the S&P 500 surged 9.1% and so far is up over 200 bp in 2020. Great for investors — for now. The Federal Reserve has expanded its balance sheet from $3.8 trillion in September 2019 to $4.1 trillion now, though the balance declined somewhat in January. Does the Fed see something we don’t, and how bad are the “overnight lending” problems it is trying to solve?

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