Six Reasons Why the Fed Shouldn’t Cut Rates; Even MORE Presidential Candidates?
Author: Greg Valliere
July 8, 2019
A 25 BASIS POINT RATE CUT is the safe bet on July 31; the markets are anticipating it, and Fed Chairman Jerome Powell probably won’t dash those expectations when he testifies before Congress this Wednesday and Thursday.
BUT WE SUSPECT THERE’S DISSENSION WITHIN THE FED, perhaps led by Cleveland President Loretta Mester, who has indicated a reluctance to reduce rates. We tend to agree with her; here are six reasons NOT to cut rates:
1. The economy is growing modestly, nothing to write home about, but probably close to 2%. And a recession is not imminent.
2. The labor market is in exceptional shape; numbers like last Friday’s jobs report reinforce the likelihood that real disposable income will stay solid.
3. That, of course, will bolster consumer spending — the engine of U.S. growth — keeping GDP on a 2% growth pace (or better).
4. Trade talks with China are back on track; a deal is likely in the next few months.
5. Rate cuts would reinforce market suspicions that Donald Trump’s furious criticism of the Fed is beginning to sway policy.
6. The Fed has a limited number of bullets — why cut rates when the stock market is near record highs?
TO BE FAIR, THERE ARE REASONS WHY THE FED SHOULD CUT: Global growth, especially in Europe, is slowing; there’s no inflation threat now (CPI on Thursday and PPI on Friday will be carefully scrutinized); U.S. businesses are grappling with uncertainty over tariffs; and failure to cut could prompt a stock market hiccup.
SO WE THINK THERE WILL BE A RATE CUT at the end of this month, but
beyond that more reductions will depend on several variables — upcoming economic data, a looming budget crisis, China trade talks, etc. All three of those factors could keep the Fed dovish, but the central bankers might prefer to wait and see on additional rate cuts this fall, as Powell may indicate in testimony this week.
* * * * * *
THE MORE THE MERRIER: Just when it seemed that the presidential field couldn’t get more crowded, billionaire investor Tom Steyer apparently has decided to take the plunge. Steyer adamantly supports impeaching President Trump and is an outspoken environmentalist; we assume he’s aiming for a strong showing in the March 3 primary in his native California. Mainstream Democrats in Washington, relieved that Joe Biden has righted the ship for now, view Steyer as a loose cannon.
STILL ANOTHER POTENTIAL CANDIDATE, who could shake up the Electoral College math, would be Justin Amash, the maverick Michigan Representative. He has quit the GOP — provoking a torrent of Twitter abuse from Trump. Amash has not ruled out running as a Libertarian, and we could envision him winning 2% or 3% of the vote in states like Michigan, making the general election even more unpredictable, if that’s possible.
COULD THERE BE EVEN MORE CANDIDATES? If Biden flames out and none of the Democrats get much traction, we have to wonder whether there might be two former Secretaries of State, in their 70s, who could jump in late this year. But let’s not go there now . . .
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI is registered as a portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
© 2020 AGF Management Limited. All rights reserved.
