The Federal Reserve is trying not to be too reactive to volatility in economic data, Boston Fed President Susan Collins told Yahoo Finance on Tuesday. As the Swiss National Bank initiates its second interest rate cut this year, the debate rages on over when the Fed will cut rates and when it will reach its 2% inflation target.

JPMorgan US Head of Investment Strategy Jake Manoukian sits down with Yahoo Finance's Morning Brief in-studio to talk about Fed commentary well ahead of the central bank's September policy meeting

"We track 37 central banks. 20 of them are already cutting rates. The Fed's going to join the party probably at some point this year. We're 90 days away from the September Fed meeting, traders are pricing in a 67% chance that that's the first cut," Manoukian tells Yahoo Finance, commenting on Minneapolis Fed President Neel Kashkari's latest statements on long-term forecasts: If rates don't come in September, "we'll, you know, kick the can to December. But it doesn't change the global backdrop that central banks are in easing mode. And Kashkari has been on the kind of hawkish end of the spectrum."

Manoukian weighs in on the rate-cutting cycles demonstrated by other global central bank, and the impact US rate cuts will have on the market (^DJI, ^IXIC, ^GSPC) and Treasuries (^TYX, ^TNX, ^FVX).

"Cash hasn't hasn't been trash. It's obviously underperformed the S&P 500, but I think it's felt like a safety blanket. And that safety blanket is going to get much less attractive when rate cuts start to come," Manoukian says. "And when you add a layer of the idea that the Federal Reserve is going to be cutting rates, most likely outside of a recession, the underperformance to both stocks and bonds is pretty meaningful."

Catch Jennifer Schonberger's exclusive interview with Boston Fed President Susan Collins.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Luke Carberry Mogan.

Video Transcript

Traders remain mixed on the feds path forward as we talking about here with nearly 60% still anticipating a rate cut in September our very own.

Jennifer Shaber spoke with Boston Fed President Susan Collins in an exclusive interview on Tuesday, Susan Collin, stressing the importance of not overreacting and that data, I think what we've seen in the data and again, consistent with what I heard on the ground today is things are very volatile.

Um You know, you get some welcome news and then they're challenging news.

And so I think it's really important not to overreact to what has been encouraging.

I think the data that we have seen recently in terms of CP I, in terms of the producer, prices is consistent with an economy that in an orderly way is becoming better aligned for more on this.

We are joined by Jake Mookie and JP Morgan's us, head of investment strategy.

Jake, thank you so much for joining us in studio.

We really appreciate it and for joining the Billie Eilish listening party earlier too, but I, I wanna join the Neil Kashkari listening party with you for a second.

He was speaking this morning, a little bit less fun.

Perhaps not for us.

But uh he said that it could take a year or two to get down to 2% inflation.

Do you agree?

It could.

But I think, I think the, um, that argument is a little bit less relevant for investment.

I think the fact of the matter is the global rate cutting cycle is already well under way, we track 37 central banks, 20 of them are already cutting rates.

The FED is going to join the party.

Probably at some point.

This year, we're 90 days away from the September fed meeting.

Traders are pricing in a 67% chance that that's the first cut.

And I think that's what investors need to focus on.

What if we don't see the first cut at that point.

Well, then we'll, you know, kick the can to December, but it doesn't change the global backdrop that central banks are in easing mode.

And Kasha has been on the kind of hawkish end of the spectrum.

It seems like the core of the committee and Jerome Powell especially is, is very much aligned on this idea that they don't need to get to that 2% target to start cutting.

Maybe they want to be there on a three month annualized run rate.

Um But I don't think they need, you know, core P ce to be at 2% to start cutting rates.

It's interesting though, when you talk about the global rate cutting cycle.

You have the Swiss National Bank kind of kicking off that domino effect, right?

One cut then followed by another.

We're not seeing that same path forward for every central bank, though, not all rate cutting cycles are going to be equal, right?

And I think that's a big difference between, um, the rate hiking cycle that we saw, which was very co ordinated and very aligned.

Um, Whereas this easing cycle is going to be a little bit more staggered to us.

That means there's probably a little bit more volatility in currency markets, maybe a little bit more volatility um uh in in FX and, and kind of cross currency fixed income.

But as long as central banks broadly are pointing in the same direction, it seems like the direction of travel is clear in terms of the support that that gives for risk assets.

I mean, the the bank of Canada would also mention how dare we forget about the cuts that they put out there ahead of the others.

But anyway, you know, one of the huge thing that, that we're trying to figure out from an investment strategy perspective, if you're an after waking up this morning, this holiday, abbreviated trading week, perhaps there's low volume that you're gonna see.

But you're still trying to chart your next portfolio positioning.

If we do head towards a wave of cuts, what is the biggest thing that you should be thinking about, yeah, I think the the first thing to think about is to be very skeptical of cash.

I mean, what, what we're seeing on our platform is our clients have around 30% of their portfolios in cash that's up from an average of 25% you know, when interest rates are at zero.

Um there's still a tremendous amount of cash that's on the sidelines that's been enjoying these kind of 5% plus treasury bill rates um that are in real terms, you know, 2 2.5% after you adjust for inflation.

So that's the best that pictures looked in a very long time.

We've been in a, you know, ne zero and negative real interest rate policy for a while.

Um So cash hasn't, hasn't been trash.

It's obviously underperformed the S and P 500 but I think it's felt like a safety blanket and that safety blanket is gonna get much less attractive when rates start, when rate cuts start to come.

And when you add a layer of the idea that the Federal Reserve is going to be cutting rates most likely outside of a recession.

The underperformance to both stocks and bonds is, is pretty meaningful when we look back at other soft landings.

So that, that's the, that's the, the key view for us for if you're waking up this morning, sticking with the bonds portion of that.

I am curious whether or not we're starting to see kind of a peak in bonds given that we've got 90 until that next potential cut from the Federal Reserve.

If that is to be true.

Have investors missed the opportunity to dive into treasuries, particularly at the front end of the curve?

I mean, they probably missed the peak in yields.

Right.

I think, you know, the tenure in our view in our base case probably isn't going back to 5%.

Um But that doesn't mean there's not opportunities in fixed income, especially for us taxpayers.

I mean, municipal bond yields have underperformed treasury yields over the last month.

And they finally widened out to levels that are a little bit more attractive on an on an after tax basis.

That's one of the key areas where we're focused is and that is even more important.

Um If you're in a high tax state, like the tri state area, California, etcetera.

Um And then when you think forward to the election, which um um might be a topic of conversation later, people are worried about the deficit, they're worried about the na the national debt.

We, we're less focused on what's actually gonna happen in this election and more focused on the long term direction of travel, which is likely to higher tax rates uh for individuals.

So that makes tax efficiency in your portfolio.

All the more important and municipal bonds are are kind of the anchor for that communication.

And also since you since you mentioned.

And in a year of global elections where, you know, more than half the world's population expected to participate in one form or another.

This could also have a major impact in terms of foreign policy and the international business relations where that is actually could potentially be a tax on top of what we're already accustomed to here.

How do you see that changing this kind of broader, um the the broader outlook that you were mentioning about?

I mean, to us, that's beside uh you guys were spending the the beginning talking about A I and the, and the mega trend that we see there.

The second mega trend that we see is around industrial policy.

And this is another similarity between both, both candidates, both parties and around the world is that there's a a renewed focus on resiliency um after the pandemic, uh given the global conflict is at 80 year highs companies and governments are laser focused on making sure they're secure and security goes beyond traditional defense.

It, it relates to supply chains, infrastructure, uh cyber security, natural resources.

Um And, and that, that I think outside of the noise around the election, investors can focus on that and the companies and industries that might benefit Jake Manu.

And who is the JP Morgan us, head of investment strategy?

Jake, great to see you here in studio with us.

Thank you.