Market bullies14th July 2019
I generally don’t like bullies, but I’ll make an exception for market bullies. Here’s the FT, from a few weeks back:
“I just don’t see the case for rate cuts, but [the June Fed meeting] was the most dovish outcome we could have had [without] an actual rate cut,” said Gregory Peters, a senior portfolio manager at PGIM Fixed Income. “Markets are bullying the Fed, and the Fed is responding.”. . .
And assuming the central bank does trim rates, will this be a precautionary move to bolster growth at a time of passing weakness, or will it solidify concerns over the slowing economy, leading markets into browbeating the Fed into a full rate-cutting cycle?
Translation of first paragraph: The markets are signaling a fall in the natural rate of interest, and the Fed is responding.
Translation of the second paragraph: If the Fed cuts rates more slowly than the natural rate is declining, the resulting economic slowdown may trigger more rate cuts.
And from yesterday’s FT:
While some investors see the Fed’s move as unjustified given stronger US economic data, the rosiest data points have been overshadowed by tumbling bond yields and a yield curve that has been inverted since the end of May.
“There is really no good excuse for cutting rates at all,” said David Kelly, chief global strategist at JPMorgan Asset Management. “They’re doing so to avoid a market meltdown.”
Seema Shah at Principal Global Advisors said: “The Fed is cutting rates not in response to the economy, but in order to avoid a market fallout . . . The Fed put itself in a corner. We’ve had a run of stronger data which at any other time would not have led them to cut rates.”
Translation: The Fed has rejected the conventional wisdom that they should respond to actual economic data and accepted the market monetarist argument that market forecasts are the most reliable guide to policy.
Is this what winning feels like?
We still have a long way to go. The Fed is increasingly willing to use market forecasts, but is doing so in an inefficient fashion. As time goes by, they’ll look for better ways to incorporate market forecasts into the policymaking process. And when they look around for better options, they’ll discover that market monetarists have been thinking about these issues for more than 30 years. Most likely, however, they’ll start with the guardrails approach.
Most news articles on the Fed are focused on the wrong issue. They look at a strong economy and see no need to ease monetary policy. Maybe that’s correct. But in order to keep monetary policy stable in a world where the natural rate of interest is falling rapidly, the Fed needs to cut rates. So don’t ease policy; cut interest rates to avoid tightening policy. How many times does it need to be said that interest rates are not monetary policy?
Based on this blog, I’d say, “apparently a lot”.
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