Generally speaking, the Feds should be cutting rates at least three to four times this year but declined to do so for several reasons.
One of the possible reasons would be the Emerging G-20 Summit, which will involve new trade agreements.
The Feds are trying to make it look like they’re not submitting to any pressure, be it the financial market or from President Trump. According to Lindsey Piegza, the chief economist at Stifel, “they ‘don’t want to be seen as cowing to any pressure, be it political from the White House or from the market.” Most likely, the Feds are only going to view what their models say, and not depend on any market results. For them, the markets don’t mean much.
However, Wall Street is demanding a cut. The Feds market shows a 21% chance of move from 30% based on economic data. As for July, the percentage of the possible reduction is at 85% while the market showed 61% in terms of a probability for moves by the end of the year.
Jerome Powell, the chairman, currently stands by this “’no cut” decision as of now. But that may change as well, especially if the fellow Feds give in their projections and opinions on the economy’s status for the next couple of years.
On another note, the markets don’t pressure Powell at all. President Trump constantly demands lower rates stating that “‘he’s not happy with what Powell has done.” This expression of discontent may probably be due to the December hike being viewed by Trump and other marketers as a result of several wrong turns and missteps. These shortcomings, in turn, may have been the cause for Powell’s sudden shift in statements.
Jeffrey Gundlach, the DoubleLine Capital founder, expresses his disbelief in the decision to not have cuts at all this year, considering the big difference in plots. Gundlach helped in a 22% increase in gain when he recommended a straddle options trade. This trade benefited from large fluctuations in interest rates.
On a rate hike from two to zero, some officials, such as Quincy Krosby, see it as a difficult transition for the Feds. Since the situation is apparent that from two rate hikes, there comes a pause and it likely moves closer to rate cuts, he points out crucial instances that recently showed signs of a change in policy. The first instance being Jerome Powell pledging to “act as appropriate to sustain the expansion” and Vice Chairman Richard ‘Clarida’s vow and strategy to keep the economy “in the right place.”
According to Krosby, comments like these are hard to let go, being evidently orchestrated and it instantly came across as “verbal intervention” that ‘didn’t need any more efforts, because the markets had already expressed their immediate reactions.
A probable reason for the Feds not cutting this month is because of the Dow Jones Industrial Average going more than 5%, showing excellent performance on stocks. Although a good start, it is not enough to consistently stop cutting rates. But take note, that if ever the agreement between the United States and China pushes through, there is a possibility of chances leading to lower cut rates.
Experts Weigh In
Jeremy Siegel, a professor of finance at Wharton University, expresses his take on the whole ”no cuts” of the Feds. Although no particular reason is stated as to why Feds are not cutting rates, Siegel says investors would be happy to hear that a directive will probably take place on July 31st that would push through with what everyone wants. In this way, the markets will most likely be satisfied.
Since the Federal Open Market Committee is set to have a meeting, Siegel suggests that Feds should make a plan known before taking action. Since the Feds are known to announce before they do something, now would be the best time to prepare and back up all that they’ve been stating.
Siegel strongly believes that a cut would eventually happen at the end of July.
In his own words, Jeremy Siegel states, “There should be a 50-basis-point cut. Given where the 10-year Treasury note is right now, we should be below on the funds’ rate than the 10-year, and even 25 basis points won’t really put us below. So I really think there should be more.”
Aside from the Feds, investors ultimately need a better approach and solution to the trade war because Q2 growth is at 1.5%. This growth is the slowest in President Trump’s term. And if this goes on, there is a high possibility of difficulty in gaining big.
With the United States having economic growth by 2.9% last 2018, a sub-2% by 2019 would mark this year as the lowest since 2016.