FLASH: Growing expectations for the Fed to cut rates to address slower growth and muted inflation; 2-yr yield drops 12 bpts to 1.83% . St. Louis Fed President James Bullard (FOMC Voter) said that slower economic growth could be sharper-than-expected due to the trade uncertainty. Mr. Bullard added that a rate cut may soon be warranted to boost inflation.
US interest rate cut “may be warranted soon” given the rising risk to economic growth posed by global trade tensions as well as weak US inflation, St. Louis Federal Reserve President James Bullard said Monday, he is the 1st Fed official to say recent events may require a central bank response.
Mr. Bullard said that while the Fed cannot respond to every change in the rapidly evolving trade feud between the US and other Top trading nations, recent events like the unexpected announcement of new tariffs on Mexican imports have created “an environment of elevated uncertainty…that could feed back to US macroeconomic performance” as the global economy slows.
The Fed “faces an economy that is expected to grow more slowly going forward, with some risk that the slowdown could be sharper than expected due to ongoing global trade regime uncertainty,” he said. “In addition, both inflation and inflation expectations remain below target, and signals from the Treasury yield curve seem to suggest that the current policy rate setting is inappropriately high.”
Along with weak inflation and warning signs from the US bond market, “a downward policy rate adjustment may be warranted soon” to help boost inflation expectations and help ease fears that have emerged in bond prices of a sharper-than-expected US slowdown.
Several earlier rounds of Trump Administration trade actions against China and other countries left Fed officials largely unmoved, saying there was no need to react unless trade tensions persisted or began changing the US growth outlook.
For Mr. Bullard, a voting member of the central bank’s rate-setting committee this year, that moment may have arrived.
Along with trade, he has been among the more concerned at the Fed about the fact that rates on 10-year T-Bonds have fallen below 3-month yields as well as below the federal funds rates itself. This “inversion” of the yield curve, he feels, has become pronounced enough to bolster the case for a rate cut.
“A downward adjustment of the policy rate may help re-center inflation and inflation expectations at the 2 percent target,” as well as provide “insurance” against a sharper than expected economic slowdown, Mr. Bullard said, comparable to rate cuts the Fed made in the mid-1990’s to nudge along that expansion.
Many of Mr. Bullard’s colleagues have been reluctant to endorse such a move, arguing that the Fed did not need to move rates from the current range of between 2.25 and 2.5% until some economic shock caused them to reconsider.
However, since the Fed last met, President Trump extended 25% tariffs to a host of Chinese goods and announced targeted policies aimed at Chinese telecoms giant Huawei. These moves triggered a sharp sell-off in US stock markets.
The Fed next meets in 2 weeks to reconsider its rate policy and issue update economic projections.
Monday, the major US stock market indexes finished at: DJIA +4.74 at 24819.78, NAS Comp -120.13 at 7332.99, S&P 500 -7.61 at 2744.45
Volume: Trade on the NYSE came in at 983-M/shares exchanged
- NAS Comp +10.5% YTD
- S&P 500 +9.5% YTD
- Russell 2000 +9.0% YTD
- DJIA +6.4% YTD
HeffX-LTN’s overall technical outlook for the major US stock market indexes is Neutral to Bearish in here.