Fed behind the curve, but it doesn't matter as there's room for policy response

Investing.com -- The Fed may be behind the curve on rate cuts, but  worries about a U.S. recession are "overblown," Macquarie says, as the central bank has ample policy options to reverse course with limited damage at a time when economic fundamentals remain strong.

"We also maintain that the nervousness about US slow down is overdone," Macquarie said in a recent note, following the recent growth economic scare. 

A slew of softer reports including the July jobs report triggered fears that a U.S. was headed for recession, prompting many to call for aggressive Federal Reserve rate cuts. 

Following economic data including last week's better-than-feared jobless claims data, recession fears have receded.   

While acknowledging that the U.S. economy is slowing and the Fed is behind the curve, Macquarie believes that the doesn't rally matter as "strong fundamentals, excess capital, instantaneous repricing and an immense policy toolkit, can reverse positions quickly with limited damage."

Macquarie's outlook echoes of that of the Fed chairman Jerome Powell, who has previously mentioned the central bank would be prepared to act should the softness in the labor market unexpectedly accelerate. 

"If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we are prepared to respond. Policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate," Powell said at the FOMC press conference on Jul. 31.  

The current backdrop reflects a "twilight of no recessions but also no "strong recoveries, complemented by lower rates and higher liquidity," Macquarie said, marking fertile ground for speculation across asset classes.

In this "twilight of abundance", however, investors need to opt for stock picking rather than factor and style strategies as the latter would "likely fail due to degradation of economic and capital market," Macquarie added.