Six Reasons Why the Fed Shouldn’t Ease This Week; Impact of Saudi Bombing; Bernie Sanders Shakeup
Author: Greg Valliere
September 16, 2019
THE OVERWHELMING MARKET CONSENSUS is that the Federal Reserve will cut rates by 25 basis points this Wednesday, after its two-day meeting. They probably will, but should they? We like contrarian arguments, and there’s one to be made within the FOMC; here are six reasons why they shouldn’t move —
1. Thanks to consumers, the economy is growing moderately; GDP probably will expand by about 2% this quarter — and a recession still doesn’t appear to be imminent.
2. Core CPI has has crept higher — it’s up to 2.4%, well above the Fed’s complicated core PCE index, and an inflationary surge is likely as gasoline prices rise.
3. The main reason for easing — trade uncertainty — seems to have diminished as a threat in recent weeks as the U.S. and China send conciliatory signals.
4. The stock market is close to record highs, and bond yields have spiked — hardly a sign of an economy in distress.
5. The Fed has only a few bullets left; why waste ammunition this week?
6. Failure to cut rates would send a clear signal to Donald Trump — butt out, you’re not the boss of us.
SURELY THESE ARGUMENTS (except the last one) will be debated by the FOMC, and a couple of dissents are virtually certain. As our friend Diane Swonk and others have argued in recent days, this is a divided Fed, with some heavyweights like Fed presidents Eric Rosengren in Boston and Esther George in Kansas City opposing more rate cuts.
BUT THE MARKETS ARE EXPECTING A RATE CUT, so one is likely on Wednesday. But we think the FOMC statement — and Chairman Jerome Powell, in his press conference — will dampen expectations of aggressive rate cuts in coming months. He doesn’t have the votes for that, at least not now.
* * * * *
THE SAUDI OIL FIELD BOMBING: It’s pointless to argue whether the Iranians or the Houthis actually launched the missiles; Iran clearly gave guidance and weapons to the rebels. So this is the first real blowback from John Bolton’s resignation — a prominent hawk has departed, and Donald Trump has been immediately tested.
TRUMP’S BOAST THAT THE U.S. is “locked and loaded” may be similar to dozens of other boasts — directed at Venezuela, North Korea, Iran, etc. — that proved to be hollow. It’s the major reason Bolton left. We think Iran is itching for a fight, eager to provoke a confrontation — anything that could lead to a truce, then negotiations that would lift sanctions. So we think this crisis could get worse before it gets better; oil prices may stay high.
ECONOMIC IMPACT: We’re amazed that most Americans don’t realize that the U.S. is energy self-sufficient; it’s one of the least appreciated economic stories of the decade. The U.S. can withstand a protracted period of global energy shortages, with a minimal economic impact (inflation, as noted above, will get a boost, at least temporarily). The big loser could be China, which is heavily dependent on oil imports — still another reason why Beijing may sue for peace in the trade war.
* * * * *
BERNIE SANDERS SHAKEUP: When a campaign isn’t going well, look for a shakeup. Sen. Bernie Sanders clearly trails Joe Biden and he can’t shake Elizabeth Warren, so his campaign this weekend announced a shakeup in its New Hampshire team. A similar shakeup by John Hickenlooper wasn’t enough; he dropped
out of the race, but we don’t anticipate Sanders dropping out — yet.
OUR GUESS IS THAT BY WINTER, the race will boil down to Biden, Warren and someone who emerges from the pack — perhaps Kamala Harris or Amy Klobuchar? The more we look at this race, the more it seems possible that there won’t be a first-ballot nominee at the party’s 2020 convention in Milwaukee.
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 Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFA and AGFUS are registered advisors in the U.S. AGFI is a registered as a portfolio manager across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. 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.
©2022 AGF Management Limited. All rights reserved.