Read my lips. No more rate cuts!

Vito J. Racanelli

On Wednesday, the Federal Open Market Committee (FOMC) cut the target for its overnight lending rate by 25 bps to a range of 2% to 2.25%. Investors widely expected this cut, but oh boy did Powell leave them wanting more. Asked if he was tamping down expectations for further rate cuts, he asserted, "Let me be clear. What I said was it’s not the beginning of a long series of rate cuts." To his credit, this is a show of atypical transparency by our usually opaque Fed overlords who may not want markets pricing in additional easing. But, is it just us, or does this comment remind anyone of George Bush Sr.'s infamous words spoken at the 1988 Republican National Convention: "Read my lips, no new taxes!"?

If this isn't the start of a rate-cutting cycle, what is it? Well, our own Tom Lee has been writing that the US economy is in mid-cycle, not late-cycle since the start of the year and Powell agrees…"We’re thinking of it as essentially in the nature of a mid-cycle adjustment to policy." So there it is folks, a mid-cycle adjustment to support the economy's current expansion, and confirmation that Tom's macro call has been right all along.

Still, if in fact this economy is in mid-cycle, the question we must ask is whether such a policy action was justified, or if Trump has succeeded in bending Fed policy to his will. The stated justification (which came prior to the latest tariff announcement) was weak global growth, trade policy uncertainty, a slowdown in business investment, and inflation below the usual 2% target. Yet according to our analysis and the analysis by the Fed, the US economy is in the middle of an economic expansion.

Thus, these are elements which threaten that expansion. As we wrote last week, members of the Fed have openly stated that the FOMC must now anticipate economic weakness rather than react to it. Given Trump's announcement on Thursday that an additional 10% tariff will be hitting ~$300 billion of Chinese goods, the cut may have helped soften the market's reaction.

The problem is that this philosophical shift in the Fed's approach to policy, if genuine, is concerning because history is rife with predictions that show that most economists, even those employed in the Marriner S. Eccles building, are notably poor forecasters.

Perhaps even more concerning though is that the self-directed mandate to anticipate is also a very good mask for a politicized Fed to hide behind. Rather than admit to political influences (i.e. Trump tweets), the FOMC can now point to potential threats to the economy which require policy adjustments to mitigate.

How the Fed acts in the coming months will hinge on economic events outside of their control such as trade negotiations, economies ex. US, and other central bank actions. To paraphrase George Bush Sr., it was just on Wednesday that Powell said, "Read my lips, no more rate cuts." Well it doesn't seem the market believes him, particularly in light of the coming tariffs in September. CME Fed futures are showing 88% probability of another cut at the next FOMC meeting in September.

The 10-year Treasury note yield closed Thursday at 1.87% versus 2.08% the Thursday before. As noted above, CME Fed futures currently places 83% probability of another cut at the next FOMC meeting in September. Our Policy Analyst Tom Block disagrees, believing rate policy will remain unchanged through year-end.

Upcoming: 8/17-18 - FOMC meeting.

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Vito J. Racanelli
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