Federal Reserve Board Chairman Jerome Powell cut the federal funds rate 25 basis points today, leaving the benchmark rate at 2.00%. Markets hoped that Powell would slash rates 50 basis points but, in the end, Powell couldn’t justify anything more than a quarter-of-a-percent. Global economic conditions in Europe and Asia has slowed, leaving some economists to speculate about a slowdown, or possible recession, in the United States. Admitting to “muted” inflation pressure and low unemployment, Powell still holds a positive feeling about U.S. economic growth, despite the inverted yield curve suggesting a recession in the near future. “In light of the implications and global developments for the economic outlook as well as muted inflation pressures,” Powell said saying the overall outlook for “moderate growth” and “low unemployment” remained strong heading into the fourth quarter.
Powell cut rates at the last Federal Open Market Committee [FOMC] meeting July 31, signaling, if nothing else, that more monetary stimulus was needed to keep the economy from sinking into slowdown or recession. Today’s cut signals more bad news for the economy, because the Fed doesn’t cut rates unless there’s a significant reduction in Gross Domestic Product. Trump criticized Powell’s move as too timid, urging the Fed Chairman to slash rates to zero. But if Trump wants the Fed to slash interest rates to zero, he’s of the belief that the economy’s in trouble, something that runs counter to his campaign speeches. When Powell cut the federal funds rate at 2:00 PM today, the Dow Jones Industrial Average dropped a 100 points. “This type of reaction we see almost every time from Fed decisions,” said Rick Meckler, at Cherry Lane Investments in New Vernon, New Jersey.
Recovering quickly from the rate cut, the Dow finished up 36 points today, shrugging off the latest Fed move. Meckler believes market recovered, realizing Powell did exactly what was right for the economy. When you consider Trump’s trade war with China adversely impacts U.S. GDP, he’ll have to make a decision in the next month when the U.S. Trade Delegtation led by Robert Lighthizer meets with the Chinese delegation. No one can tell Trump what to do but it seems obvious that continuing the trade war risks slowing the economy heading into the 2020 Election Year. Since Trump started applying tariffs to China July 6, 2018 on 34 billion of Chinese goods, Trump thought China had more to lose than the U.S. So far, Chinese President Xi Jinping has showed no signs of buckling, letting the tariffs play out indefinitely. Now that its hurting Trump’s reelection chances, maybe something will get done.
Slashing interest rates, even on 25 basis points, has implications for Wall Street, looking to take more defensive positions going forward. If there’s no signs that the trade war can get resolved anytime soon, markets could sell off like they did in July, practically 2,000 points. “The first move is from the people who think it’s not enough, and at the end of the day, people conclude that they did exactly what investors expected them to do. Those people who got what they expect used the sell off to buy, and I think that’s what happened here,” Meckler said. What Meckler isn’t saying is that if investors believe a slowdown or recession is imminent, short-sellers will take over the market, driving averages into correction phase of at least 10%. Getting a “dead cat bounce” today doesn’t mean that it will hold up tomorrow, especially if investors conclude that a slowdown or recession is imminent.
Trump can’t have it both ways with Wall Street: Claim that he wants all the fiscal and monetary stimulus he can get, while, at the same time, continuing his trade war which is a big drag on the economy. Finding a face-saving way out of the trade war only makes sense to a president known mostly for his economic prowess. If voters see the economy sinking into a slowdown or recession in 2020, he’ll undermine his main argument for reelection. Powell doesn’t have a lot more room to cut the federal funds rate unless there’s another economic crisis like the 2008 economic meltdown. Looking for more stimulus, Trump has some big decisions between now and when he meets with the Chinese trade delegation in October. Since he won’t get too many more rate cuts from the Fed or another tax cut through Congress, Trump controls economic stimulus by ending the China trade war.
Given geopolitical events like the recent attack on a Saudi oil refinery, the Fed did the right thing cutting the federal funds rate 25 basis points. Getting rid of National Security Adviser John Bolton Sept. 10, Trump sent a signal that he’s not inclined to get the U.S. into another regional war, whether in the Mideast, Asia or South America. Given the Sept. 14 attack on Saudi’s largest oil refinery, whether by Yemen’s Houthi rebels or Iran, Trump’s reluctant to start using the U.S. military to resolve disputes. Wall Street can’t take another major geopolitical event without consequences on the U.S. economy. Whatever the evidence that Iran’s responsible for Saturday’s attack on Saudi Arabia, Trump made it clear it was not an attack on the U.S. Any retaliatory military strike wouldn’t play well on Wall Street or the U.S. economy. Trump must balance what’s good for the economy, not just for himself.
