The Fed’s Meeting Minutes from July were released last week and they revealed the 3 reasons the Fed lowered short-term rates. First, because growth is slowing down due to the trade war. Second, inflation is running below their target rate which it has been for 11 years. Maybe they need to lower their target rate of inflation? Instead, the Fed continues its stance of insanity (doing the same thing over and over, but expecting a different result). Third, the rate cut was seen as risk management. However, there were 2 members who wanted a 50 bps cut and other members who didn’t think a rate cut was needed at all.
Fed Chair Powell reiterated each of these reasons when he spoke last Friday from Jackson Hole, especially further evidence of a global slowdown. But, he did say U.S. economic conditions are favorable as there is strong job growth and consumer spending.
The market is fully expecting the Fed will cut short-term rates by 25 bps in September, but 3 Fed members spoke last week saying they are not in support of any more rate cuts and were not in favor of the last one. Why? Eric Rosengren cited strong consumer spending and Esther George cited our incredibly low unemployment rate and inflation rate.
I am not as convinced that the Fed will drop short-term rates in September when the Fed has already allowed 3 members to speak out against further rate cuts. This week we will receive the July Core PCE report on inflation and next week will be the August Jobs Report and I believe the outcome of these 2 reports will have a big impact on the Fed’s decision making.
Or a rate cut of 25bps in September may be their last cut for a few months and in essence they are undoing their last 2 rate increases last fall which they shouldn’t have done. I think the Fed only cuts rates further IF the Fed cares about the Inverted Yield Curve as they could un-invert the yield curve by dropping short-term rates quickly.
The other wild card is our Tariff War with China and this battle may force the Fed to lower short-term rates more than they want to. I believe President Trump is provoking the Trade War partially to force the Fed to drop short-term rates which can weaken our Dollar which is needed too.