Six Reasons Why the Fed Shouldn’t Ease This Week; Impact of Saudi Bombing; Bernie Sanders Shakeup

Insights and Market Perspectives

Author: Greg Valliere

September 16, 2019

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THE OVERWHELMING MARKET CONSENSUS is that the Federal Reserve will cut rates by 25 basis points this Wednesday, after its two-day meeting. They probably will, but should they? We like contrarian arguments, and there’s one to be made within the FOMC; here are six reasons why they shouldn’t move —

1. Thanks to consumers, the economy is growing moderately; GDP probably will expand by about 2% this quarter — and a recession still doesn’t appear to be imminent.

2. Core CPI has has crept higher — it’s up to 2.4%, well above the Fed’s complicated core PCE index, and an inflationary surge is likely as gasoline prices rise.

3. The main reason for easing — trade uncertainty — seems to have diminished as a threat in recent weeks as the U.S. and China send conciliatory signals.

4. The stock market is close to record highs, and bond yields have spiked — hardly a sign of an economy in distress.

5. The Fed has only a few bullets left; why waste ammunition this week?

6. Failure to cut rates would send a clear signal to Donald Trump — butt out, you’re not the boss of us.

SURELY THESE ARGUMENTS (except the last one) will be debated by the FOMC, and a couple of dissents are virtually certain. As our friend Diane Swonk and others have argued in recent days, this is a divided Fed, with some heavyweights like Fed presidents Eric Rosengren in Boston and Esther George in Kansas City opposing more rate cuts.

BUT THE MARKETS ARE EXPECTING A RATE CUT, so one is likely on Wednesday. But we think the FOMC statement — and Chairman Jerome Powell, in his press conference — will dampen expectations of aggressive rate cuts in coming months. He doesn’t have the votes for that, at least not now.
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THE SAUDI OIL FIELD BOMBING: It’s pointless to argue whether the Iranians or the Houthis actually launched the missiles; Iran clearly gave guidance and weapons to the rebels. So this is the first real blowback from John Bolton’s resignation — a prominent hawk has departed, and Donald Trump has been immediately tested.

TRUMP’S BOAST THAT THE U.S. is “locked and loaded” may be similar to dozens of other boasts — directed at Venezuela, North Korea, Iran, etc. — that proved to be hollow. It’s the major reason Bolton left. We think Iran is itching for a fight, eager to provoke a confrontation — anything that could lead to a truce, then negotiations that would lift sanctions. So we think this crisis could get worse before it gets better; oil prices may stay high.

ECONOMIC IMPACT: We’re amazed that most Americans don’t realize that the U.S. is energy self-sufficient; it’s one of the least appreciated economic stories of the decade. The U.S. can withstand a protracted period of global energy shortages, with a minimal economic impact (inflation, as noted above, will get a boost, at least temporarily). The big loser could be China, which is heavily dependent on oil imports — still another reason why Beijing may sue for peace in the trade war.
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BERNIE SANDERS SHAKEUP: When a campaign isn’t going well, look for a shakeup. Sen. Bernie Sanders clearly trails Joe Biden and he can’t shake Elizabeth Warren, so his campaign this weekend announced a shakeup in its New Hampshire team. A similar shakeup by John Hickenlooper wasn’t enough; he dropped
out of the race, but we don’t anticipate Sanders dropping out — yet.

OUR GUESS IS THAT BY WINTER, the race will boil down to Biden, Warren and someone who emerges from the pack — perhaps Kamala Harris or Amy Klobuchar? The more we look at this race, the more it seems possible that there won’t be a first-ballot nominee at the party’s 2020 convention in Milwaukee.