Fed: It’s 3 and Out for Rate Cuts; No Mas and No Reversal Seen

The Federal Reserve took some bows last week in the relatively safe halls of the Democratically controlled Congressional House of Representatives, where President Donald Trump’s tweeting thunderbolts have no sway.

In two separate appearances before House committees, Fed chairman Jerome Powell made clear that the Federal Open Market Committee (FOMC) was going to stand pat after three rate reductions this year to the Fed funds rate. Done and done. Effectively, Powell said that current interest-rate policy is in the right place. But, hey, the Fed continues to be data dependent.

Well that’s fine, but let’s see what happens if the market corrects. That’s not our house view but the Fed has been a bull market enabler for years now, though not a particularly consistent one, as we saw last winter.

Specifically, Powell said the Fed is optimistic that the interest-rate cuts this year would help support the economy against headwinds, such as an economic slowdown outside the U.S. and lingering trade uncertainty from the U.S.-China trade spat of the past few months. He noted the Fed views the current policy stance as appropriate as long as the U.S. economy grows moderately and the labor market remains strong.

When asked about rates next year, Powell repeated the central bank’s mantra: If new data prompted a reassessment, the Fed would “act appropriately.”

Of course, the President doesn’t miss a chance to thump Powell and did anyway last week. In a tweet Thursday, he claimed that Walmart’s quarterly results, in which sales were up even as income fell, showed that tariffs hadn’t hurt growth. “No impact from tariffs. Inflation low (do you hear that Powell?)!” When given a chance to respond to Trump’s lashing, Powell politely demurred.

Now what happened to all that recession worry of a few months ago? Poof, gone. What wonders a new all-time stock market high creates. And the bond market seems to be confirming. U.S. Treasury bond yields have risen sharply from near all-time lows in the last month, indicating market recession concerns have eased, thanks partly to the U.S.-China talks seemingly moving to a Phase 1 deal and some better than expected economic reports. Even yields in some European countries, France and Belgium, went above zero for the first time in months.

Meanwhile, other things worry me. The U.S. budget gap grew 34% in the first month of the fiscal year as federal spending outpaced revenue growth, pushing the 12-month deficit past $1 trillion for the first time since February 2013. Someone is going to have to pay for that. And the Feds are projected to continue running trillion-dollar deficits over the coming decade. Eventually, that’s going to hurt.

The CME Fed futures market, which has a good predictive track record about rates, showed that investors have put just a 1% probability of another rate cut next month, at the Fed’s last meeting of the year. That’s down from 24% one month ago. The market gets the message—or is the market giving the Fed the message?

The U.S. Treasury 10-yr note yield was around 1.83% up from 1.71% Nov. 2 and below 1.5% in September.

Upcoming: 12/10-11 - FOMC meeting. Don’t expect any changes.

Disclosures (show)

Stay up to date with the latest articles and business updates. Subscribe to our newsletter

Articles Read 1/2

🎁 Unlock 1 extra article by joining our Community!

Stay up to date with the latest articles. You’ll even get special recommendations weekly.

Already have an account? Sign In

Want to receive Regular Market Updates to your Inbox?

I am your default error :)