Markets vacillated Friday with the Dow Jones Industrial Average closing at 27,154, down 68 points, still near record highs, anticipating a rate cut July 31 when the Federal Reserve Board’s Open Market Committee [FOMC] meets. Market were in rally mode last week breaking new records anticipating a 50-basis-point cut when the FOMC decides to cut federal funds rate for the first time in 11 years. Back then, former Fed Chairman Ben S. Bernanke slashed interest rates Dec. 16, 2008 to zero-to-a-quarter percent to stave off another Great Depression. When Lehmann Brothers went bankrupt Sept. 15, 2008, Bernanke didn’t waste any time providing urgent CPR to the U.S. economy, looking like a crash landing. J.P. Morgan bought Bear Stearns March 16, 2009 for pennies-on-the-dollar, preventing another major U.S. bankruptcy, hoping to avoid more damage to the U.S. economy.
Fed watchers hoped that Federal Reserved Board Chairman Jerome Powell would slash interest rates 50-basis-points July 31, based on a shrinking U.S. Gross Domestic Product [GDP] now running under 2%. “It pays to act quickly to lower rates at the first sign of economic distress,” said New York Fed President John Williams, signaling to markets that the Fed would act aggressively at the next FOMC meeting. Today’s federal funds rate is 2.5%, after Powerll, for some inexplicable reason, hiked rates four times in 2018 or a full one percent. After passing tax reform Dec. 22, 2017, Trump hoped Powell would not pour cold water on the biggest fiscal stimulus since former President Ronald Reagan’s tax in 1986. Raising rates four times in 2018, Powell put a damper on U.S. economic growth, cutting GDP growth from nearly four percent down to about two percent.
Whatever preventive measures the Fed takes July 31, Trump wonders what GDP would have been had Powell not hiked rates in 2018. For the Fed to consider slashing at much as 50-bsisis points, Powell must see the U.S. economy heading into recession or at least an economic slowdown. All the political hype about how the economy’s booming is undermined by Powell considering a 25-to-50-basis-point cut. Alliance SE economist Mohammed El-Arian doesn’t see the economy heading into recession, despite the global slowdown. He can’t explain how record unemployment, now at 3.7 percent, hasn’t translated into more inflation, something that usually happens in a full employment. When you consider that three’s virtually no inflation, Powell and his FOMC fed governors, looking at a slowing economy with consumers, accounting for two-thirds of GDP, not spending significant money.
New York Fed governor Williams concluded, “it’s better to take preventive measures than to wait for the disaster to unfold,” hinting that bad things are coming. If you listen to Trump and the GOP, you’d think the economy was going gangbusters. When you listen to Williams, it tells a different story, taking about possible “disaster.” St. Louis Fed. President James Bullard interpreted Williams’ comments differently. If You listen to Williams, you’d link it was nearly certain that Powell would cut rates by 50-basis-points. “This was an academic speech on 20 years of research,” said a New York Fed spokesman. It was not about potential policy actions at the upcoming FOMC meetings.” Wall Street traders anticipating a 50-basis-point could be setting markets up for a fall at the end of the month. With the labor market adding 240,000 jobs in June, it’s doubtful the FMC will go 50-basis-points
Putting the odds of a 50-basis-point hike at 50% after Williams’ remarks, Fed Vice Chairman Richard Clarida said the Fed doesn’t “have to wait until things get so bad to have a dramatic series of rates cuts,” refusing to speculate what the Fed would do at the July 31 FOMC meeting. Trump wants the Fed to cut 50-basis-points or more to counteract Powell’s 2018 rate hikes. Trump believes U.S. GDP would run at four percent had Powell not hiked rates four times, or one percent, in 2018. “We believe that NY Fed had no other choice but to issue a press release given that the Fed’s blackout period on July 20 before the next FOMC. Bullard, a voting member of the FOMC, said he saw a 25-basis-point cut, not the 50-basis-point cut Wall Street expected. Without getting the 50-basis-point cut, Walls Street could sell of its current highs, discounting shares five-to-ten percent.
Trump has a lot riding on the Fed’s next FOMC meeting, knowing a slowing economy heading into an election could be curtains for his reelection. Today’s economic slowdown has more to do with global factors, not necessarily Trump’s trade war with China. International Monetary Fund [IMF] 63-year-old Director Christine Lagarde thinks Trump’s trade war costs about 25-basis-points off U.S. GDP. Whether that’s true or not is anyone’s guess. What’s certain in that respected economists like El-Erian can’t explain why a full-employment economy is not generating inflation. Fed watcher Ken Matheny at London-based Macroeconomic Advisers thinks that Williams spoke hypothetically but sees no reason for the Fed to cut more that 25-basis-points July 31. Trump doesn’t like the idea that his reelection bid hinges on the Fed providing enough fiscal stimulus.
