A quarter-point interest-rate cut by the Federal Reserve next week would be the most favorable scenario for financial assets, with a deeper reduction running the risk of alarming investors, according to Charles Schwab Corp.’s Omar Aguilar.
If policymakers keep borrowing costs unchanged, Wall Street will likely react “fairly negatively” given an interest-rate reduction is all but priced in, the CEO and CIO of Schwab Asset Management said at the Future Proof conference in Huntington Beach, California.
If the Fed goes big — cutting interest rates by 50 basis points — investors could perceive that as a sign the economy is in trouble.
“So 25 basis points seems to be like the right spot,” he said in an interview. “That’s what the market is expecting at the moment, and I think it will be seen as a fine-tuning of the current monetary policy.”
Traders are now fully pricing in a quarter-point rate cut at the U.S. central bank’s Sept. 16-17 policy gathering. Weaker-than-expected employment data last week prompted some Fed watchers to speculate officials may consider a 50 basis-point rate cut this month.
Despite the marked weakening becoming evident in labor-market data, Aguilar still sees the U.S. economy on track for a soft landing and doesn’t see recession “even in the realm of possibilities,” which leaves U.S. stocks poised for further gains.
However, he does anticipate higher volatility in the months ahead following a 31% rally in the S&P 500 Index from its near-term low in April.
“We believe that it’s a good opportunity for active managers, for stock selection,” he said. “There’s going to be more dispersion.”
Aguilar says the firm has been moving into small-cap stocks over the past three to five months on anticipation of interest rate cuts, as well as into more cyclical pockets of the market that tend to perform well when the economy transitions from a slowdown into a recovery.
Although the labor market is now softening, he views it as still “pretty healthy” and at a level investors would be comfortable with. Moreover, stimulus from President Donald Trump’s tax bill will be favorable for investors, and companies and consumers continue to have solid balance sheets, he said.
“When you put those things in perspective, that’s a big tailwind for the economy and for the market,” Aguilar said.
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