Fed-rate decision: Investing strategies, scenarios from Wall Street

A major shift in monetary policy took place on Wednesday, when the Federal Reserve confirmed it was open to cutting interest rates for the first time since the Great Recession.

While many traders believe the Fed will act at its July 31 meeting, a slew of economic data and trade developments before then could dramatically alter their outlooks.

Business Insider compiled commentary from Wall Street experts on what investors should be watching for sources of volatility and how to take advantage of the next few weeks.

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The Federal Reserve has entered a new era in which it stands ready to cut interest rates for the first time since the financial crisis.

In its policy update on Wednesday, the central bank excluded the word “patient” in its description of future rate changes and said it would act as appropriate to sustain the economic expansion.

Many investors are almost sure the Fed will cut rates in July, with interest-rate probabilities at 100% and bond yields at multiyear lows.

But there's a crucial stretch between now and July 31, when the Fed releases its next statement. If that span seems like just a matter of weeks, consider how dramatically the outlooks for investors and the Fed have changed since early May, when the US-China trade spat escalated.

Read more: 'We're going to get rolled': Billionaire investor Stanley Druckenmiller breaks down why the US is headed for devastating losses to China in the trade and tech wars

Against this backdrop, how should investors position for possible volatility and what market opportunities lie ahead？ The quotes below highlight the views of six experts, based on interviews with Business Insider on Thursday and notes they published.

Lindsey Bell, investment strategist, CFRA

“Earnings season starts in July, and I don't think that guidance is going to be very positive from these companies because they have no incentive to be overly optimistic when we're in the midst of this trade spat,” Bell told Business Insider in an interview. “The tariff increase from 10 to 25% on $200 billion [worth of Chinese goods] at the end of last quarter's earnings season really hasn't been baked into guidance from CEOs and CFOs in the S&P 500 yet. I would expect them to reduce expectations through the earnings season.”

She added: “I don't think July is guaranteed. I think that the market may be doing some of the heavy lifting for the Fed itself right now. We see the 10 year below 2%. That in and of itself can be stimulative to the economy near term.”

John Augustine, chief investment officer, Huntington Private Bank

“We're going to get two consumer-sentiment numbers next week and we'll get another business-sentiment number in early July,” Augustine told Business Insider in an interview. “If those reverse higher, that could change the Fed's view.”

He continued: What's on our minds for investors is earnings in July and what's going to happen to earnings estimates this year. If earnings estimates move lower, we think the PE multiple on the S&P 500 — now running close to 18 times on a trailing basis — is going to potentially pressure stocks.

Read more: The US economy is resisting a slowdown plaguing the rest of the world. Here's why one Wall Street expert worries its fortunes are about to change.

Tom Porcelli, chief US economist, RBC Capital Markets

“You're going to get Q2 GDP three business days before the FOMC meeting, and it's probably going to show that the consumer [spending growth rate] has a four handle on it,” Porcelli told Business Insider in an interview. “So I'm struck by people thinking that [the Fed made] an economic call. I think it's entirely about the narrative: the negative narrative coming out of trade.”

He added: It's befuddling to me that people keep on talking about how data have softened in the United States. I don't know where. Don't come to me with Empire Manufacturing as a smoking gun. It's the most volatile of the regional indicators.

“If the preponderance of data continue to show that economic activity is chugging along here, and you get something positive out of G20, under what justification is the Fed cutting rates in July？”

Rick Rieder, chief investment officer of global fixed income, BlackRock

“At this stage, the rate cycle has clearly entered a new phase of easier policy alongside of some clear global economic weakness, some softening of conditions in the US, some heightened trade/political uncertainties and an inflation dynamic that is not moving closer to the Fed's 2% target, and indeed, by some measures, has recently been moving further from it,” Rieder wrote in a client note.

He continued: “Hence, today's statement made very clear the direction of the Fed's current thinking on either moving rates lower at the July (or maybe September) meeting, and potentially also on ending the reduction of the size of its balance sheet (and letting it grow from here through Treasury purchases).”

Michelle Meyer, head of US economics, Bank of America Merrill Lynch

“Today's FOMC communications avoided the risks we previously flagged around an insufficiently dovish Fed and reinforces our medium term expectations for lower rates and a steeper curve,” Meyer said in a client note. “We continue to believe the Fed will lower rates later in the year and expect the Treasury curve to bull steepen in the current environment.”

She added: “On the USD, we think that the US dollar is peaking and will turn lower into year-end, a process we expect to be facilitated by Fed easing within the context of a USD that continues to look broadly rich to fair value. Our forecasts call for USD/JPY at 101 and EUR/USD at 1.17 in 4Q.”

Zach Pandl, cohead of foreign exchange and emerging-market strategy, Goldman Sachs

“In US rates, despite the substantial move to date, we would not recommend fading the rally at this stage,” Pandl said in a client note. “If the Fed delivers 2-3 rate cuts, we could see 10y Treasury yields decline to as much as 1.75%, and would look for further curve steepening, especially in 5y30y.”

He continued: “For the US dollar, Fed rate cuts and somewhat softer US growth likely point to choppy downside in the months ahead, as rate reductions gradually eat into elevated USD carry.”