President Trump’s Tweets have not fully convinced the Fed to cut interest rates, but the stock and bond markets likely can and will.
The Fed did not make a cut at its meeting last week, but it hinted strongly that one may be coming soon.
Afterward, the stock market soared to new highs and the yield on the benchmark 10-year T-Note fell to 2.0%, a 1 pt below where it stood in November 2018
Stock and bond traders seem sure that money is about to get cheaper. Futures markets have been betting for a while that the Fed will cut rates at least a Quarter of a percentage point in July.
The Fed’s biggest concerns are global.
Higher tariffs could slow growth both here and overseas, while a weak economy in Europe, combined with a strong USD, dims the outlook for US ‘Made in the USA’ exporters.
The US and China could still de-escalate their trade dispute, and the U.S. economy is putting up numbers that do not scream “rate cut.”
GDP grew 3.1% in Q-1, and unemployment fell last month to 3.6%.
With investors sconvinced that a rate cut is coming, Chairman Powell and other policymakers will have to communicate their intentions clearly ahead of their July meeting.
If you set up a surprise for the markets, that could be painful. We believe the FOMC would avoid that.
They would also like to avoid seeing the bond market become any more uncertain. The 3-month T-Bill, at 2.14%, has a higher yield than the 10-year T-Note, a situation that is known as an inverted yield curve.
Such inversions often precede a recession.
St. Louis Federal Reserve Bank President James Bullard, who cast a dissenting vote last week because he wanted to see an immediate rate cut, has often worried aloud about the yield curve.
By cutting the short-term rate it controls, the Fed could drive the 3-month rate down. The curve is telling them they have to cut rates until they take the inversion out of the market.
Shayne and I believe the Fed will cut rates 2X, probably in July and September, partly to get in sync with the rest of the world.
Note: Every other major central bank has been lowering rates while the Fed were raising them and then pausing.
Complicating the decision is President Trump, as he has threatened to fire or demote Mr. Powell and wants the Fed to cut rates by a full percentage point.
The Fed treasures its independence and does not want to be seen as caving in to political pressure.
President Trump’s broadsides will influence an interest-rate decision, even though the FOMC is expressly apolitical, but…
If there is a rate cut next month, expect President Trump to take credit. But, notably the more important pressure on the Fed is coming from the financial markets.
HeffX-LTN is Bullish the overall stock market, and Bearish the USD in here.
Have a terrific weekend