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.
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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 . . .
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