“The FOMC faces an economy that is expected to grow more slowly going forward, with some risk that the slowdown could be sharper than expected due to ongoing global trade regime uncertainty”, Jim Bullard said, in prepared remarks for a chat in Chicago, where the Fed is convening their policy framework review this week.
Bullard goes on to (basically) call for rate cuts. “A downward policy rate adjustment may be warranted soon to help re-center inflation and inflation expectations at target and also to provide some insurance in case of a sharper-than- expected slowdown”, he says. “Even if the sharper-than- expected slowdown does not materialize, a rate cut would only mean that inflation and inflation expectations return to target more rapidly”.
The dollar slipped and the front-end rallied. 2-year yields fell back to day lows, near 1.84%. Treasury futures volume spiked and the curve bull steepened some more, up through 24bps.
We’re now witnessing a veritable mania in Fed cut speculation. It is quite something to behold.
If Donald Trump was aiming to force rate cuts by acting as crazy as possible on the trade front, he has succeeded – at least as far as the market is concerned. Because now, if the Fed sits on its hands, everyone is going to be very, very disappointed. In fact, it’s looking increasingly likely that Powell needs to move this month if he wants to placate those hoping for a dovish surprise.
Read more: ‘The Main Story Here’
The question, as ever, is whether rate cuts right now make any sense. Just two months ago, the prospect of Fed cuts seemed ludicrous, even as STIR traders had been pricing out hikes for months. The idea of cutting rates with the economy growing at a 3% clip and unemployment at a five-decade nadir is facially silly, and everyone was quick to say as much – especially on days when Larry Kudlow and Stephen Moore were all over the financial media insisting that Powell atone for the December hike before it’s too late.
Fast forward to June, and suddenly, Wall Street is scrambling to adjust their official Fed calls in the wake of Trump’s decision to, in order, more than double tariffs on $200 billion in Chinese goods, threaten the imposition of duties on $300 billion more, blackball Beijing’s crown jewel in Huawei, strip India of GSP status, threaten imminent tariffs on Mexico and, reportedly, ponder the prospect of tariffs on Australia.
All bets are now off, or, actually, all bets are now on, if what you mean by “bets” are rate cut bets.
At this point, easing doesn’t seem like such a crazy idea, until you consider that it could potentially make the situation worse by compelling Trump to get even more aggressive towards America’s trade partners on the assumption he’s finally co-opted the central bank (as any authoritarian leader worth his salt eventually does).
Over the weekend, we reiterated the importance of ISM in the narrative, and while the May print wasn’t a disaster, it was the lowest since October 2016 or, more to the point, the lowest of Trump’s presidency. At the same time, JPMorgan’s Global Manufacturing PMI slipped into contraction territory.
Meanwhile, stocks still haven’t come even close to catching down to 10-year yields, something which is or isn’t concerning, depending on your penchant for describing the visual in the bottom pane as a “chart crime”.
There’s nothing particularly profound about any of the above (and some of it will feel repetitive to regular readers), but Bullard’s comments are notable and the disconnects highlighted in yellow in the visual are too. Those are simple charts, but, as I’m fond of saying when it suits me, there’s elegance in simplicity.
you are right on point Mr H. and i need you to keep reminding me of the obvious (that is a serious comment). sometimes it is easy to get lost in all the noise.
Bullard’s ‘musings’ are just to give Trump cover on his interfering with th Fed. Higher tariffs on virtually all Chinese goods will eventually increasingly be passed on to the American consumer, which would be inflationarey, obviating the need for deflationary-protection rate cuts. Or is Bullard just trying to avoid a rececession which would hinder Trump’s re-election prospects…Bigly.
Is the die cast? Is a recession avoidable? Or will it be like the Greenspan era, where a run of the mill cleansing recession is deemed unnecessary and avoidable, until the garbage gets piled so high that we have the recession of our lifetimes?
Blah blah blah. The only squiggly line needed is the one showing the S&P is 5% below all-time highs. The markets are screaming for cuts, so obviously the Fed will oblige so that the loser Wall Street investments in Treasuries can be vindicated with a continuing bond rally as we head toward -6%. Obviously with the Fed mandate of stable prices in the teeth of tariff hikes in an okay economy you cut interest rates 50+ bps. That is just math. Good thing Herman Cain or Stephen Moore aren’t on the Board of Governors or the Fed may do something really stoopid.
never clear to me why you think you’re proving something by castigating financial analysis as “blah, blah, blah” “squiggly lines”. if you don’t like and/or don’t derive any value from it, don’t read it. it’s just that simple. i don’t like McDonald’s, but I don’t show up there every day and shout “nasty, nasty, nasty” at the cashier.
I don’t think Harvey is castigating financial analysts here….I think we all derive a lot from hearing ourselves talk even if none else does…This picture of what drives this last 5 years in Equity prices is far from clear (sorry Charlie) and there is definitely something inbred in the community that is charged with analysis….. It is supper tough being relevant when the system at the top intends to obfuscate not elucidate …
harvey is cool. he’s just that friend that likes to push your buttons everyday.
I thought , I was pretty sure you two were well acquainted from my recollections of past interchanges on this blog.