Trump Calls for More Rate Cuts; the Fed Demurs Again

Vito J. Racanelli

We haven’t even gotten to New Year’s Day 2020 and already President Donald Trump is again banging the drum for interest rate cuts from the Federal Reserve Board. Well, of course, it’s not like he has other stuff to do, like ward off impeachment.

And already Fed policymaking officials are defending the idea that the 2019 three rate cuts already put into force this year are enough to support the economy.

Haven’t we seen this movie before?

In several recent media interviews, Fed policy officials, such as James Bullard, president of the St. Louis Fed, went out of their way to emphasize two things: the Fed is happy where rates are and that it will take a lot in the way of inflation to change the current policy. The presidents of the Dallas and Boston Fed banks, in separate appearances Tuesday in New York, were happy with the current level of the Fed futures rate and upbeat about the U.S. economy.

Monetary policy is in a good place is the watchword from the Fed. Expect no change.

With the Fed quiescent, I turn to other central bank news, where the action is easing, as my colleague Tom Lee notes in his outlook, page 3. The Bank of Mexico, for example, reduced rates for the fourth consecutive time since August, hoping to support a faltering economy while inflation is under control. The overnight target rate was cut by a quarter percentage point to 7.25%. Mexico’s annual inflation was about 3% in November, close to the central bank’s target and the lowest level since September 2016.

Meanwhile, Sweden’s central bank, an early adopter of negative interest rates, became the first to move away from that. I wonder if this is a harbinger of things to come as the world’s economy starts to grind higher.

As I’ve always noted in these pages, don’t bother with the Fed’s dot plot for an indication of where U.S. rates are going. Just watch the CME fed futures market, which currently puts a rate change next year at less than 50%.

Separately, the New York Fed continues to add temporary liquidity to the money markets, but last week saw lower demand for overnight funding.

Bottom Line: The Fed will continue drift into the background for a while.

The U.S. Treasury 10-yr note yield was around 1.92% up from 1.84% last week and below 1.5% in September.

Upcoming: 1/28-29 - FOMC meeting. No action expected.

More from the author

Vito J. Racanelli
Share
Disclosures (show)
FS Insight

Sign in to read the report!

We have detected you are an active member!

Ray: 7584e7-ae0e4f-6a2286-e059cf-305f08

Want to receive Regular Market Updates to your Inbox?

I am your default error :)

Events

Tickers

Trending tickers in our research