What is the Fed Trying to Do?
The Fed is very vocal about it's dual mandate, low unemployment and low inflation. Currently unemployment sits at a low of 3.7%, the lowest since we first landed on the moon back in 1969. Inflation also has been historically low. Non-core CPI (what the Fed says they follow) has been hovering between 2.3-2.4 all year, which is fine. The Fed says two thing about inflation; they expect it to move inversely with unemployment and they have a target of 2%. My reading of this makes me question my sanity, slightly above their target and but not increasing, an ideal situation, yet they still want to cut rates?! Again watch the crazy pills clip here.I'm trying to put myself in the Fed's shoes to figure out what is they are thinking. This week NY Fed President inferred a rate cut was to "take preventative measures." That remark was taken to mean a 50bps cut was more likely than 25bps so much they had to issue a statement walking it back. Even at 25bps the Fed is gambling we are heading into a recession with a poor track record. In the last recession the Fed began easing in September 2017. That was a few months before the subprime mortgage crisis went super-nova but would anyone argue this cut did anything to soften the landing?
What should the self described "data dependent Fed" be looking at?
Is the data showing us going into a recession? Beyond unemployment and inflation the numbers have been coming in great. Retail sales released on July 16 showed June 3.4% over last year and had positive revisions to previous, slower months. Another vouch for a strong US consumer, Consumer Credit expanded 4% in May. So why are consumers taking out loans if there is a recession around the corner? Also, the banks that have reported earnings have shown strong mortgage numbers. About they only number to reinforce their "preventative measures" argument, Q2 GDP is coming out this week expected at 1.8% after Q1 of 3.1% but would any number cause the Fed to halt their cuts?What are the dangers?
A 25bps cut would mean a 10% reduction in the upper bound. The last easing period we were twice as high before cutting. We cannot cut based on preventative measures in an economy that could be argued to be booming. If the economy takes a turn for the worst the Fed will have no room for additional cuts. How do you stimulate an economy by telling it the new "deal" on interest rates is only 2 percentage points different than before? Is that going to drive new mortgages or commercial loans? The only thing the Fed would have left would be another asset purchasing program, the legality of which is up for debate.Look around to who is asking for a cut, it's Wall Street. Wall Street would love to have cheaper money again to fuel the stock market. We see this as the CME FedWatch is dependent on market data and they fully expect to get their cut. The problem is that cheap money into the stock market is only going to fuel bubbles. Making stock market pain even worse in the next pullback.
Given the good economic data, the Fed cutting would be unprecedented and irresponsible. As every business cycle comes to an end, so to will this one and we will have nothing left as far as monetary easing to fight the next recession. I would urge the Fed not to cut rates. Our next move should be higher rates in this economy, not lower.
