Morning Report: Donald Trump pushes the Fed for lower rates

Vital Statistics:

 

Last Change
S&P futures 2893 -2.75
Eurostoxx index 388.4 0.22
Oil (WTI) 63.35 0.27
10 year government bond yield 2.50%
30 year fixed rate mortgage 4.17%

 

Stocks are flattish this morning as the Trump Administration and China get closer to a trade deal. Bonds and MBS are up.

 

This week will be relatively data-light, although we will get inflation data on Wednesday and Thursday. Fed Head Jerome Powell will speak to Democrats at their annual retreat. I doubt there will be anything market-moving in Powell’s speech, but you never know.

 

Lennar is making a big bet on entry-level homebuyers, launching new communities with prices in the mid $100,000s. The homes range from 1200 – 2200 square feet and are on 40 foot lots. Prices range from $162,000 – $200,000.

 

Former Kansas City Fed Chief and restaurateur Herman Cain is currently being vetted by the Trump Administration for a Fed post. He has some allegations of sexual misconduct, and so far most Republicans are in wait and see mode during the process. Over the weekend, Larry Kudlow and Mick Mulvaney stressed that the two nominations were “on track.”

 

Donald Trump said the economy would “take off like a rocket ship” if the Fed cut rates. He also criticized the “quantitative tightening” – i.e. reducing the Fed’s balance sheet. His feelings about monetary policy are natural – there isn’t a politician alive who doesn’t prefer lower rates to higher rates, but his constant criticism is something new. That said, there is a partisan bent to monetary policy. Republicans fret about monetary policy being too loose when Democrats are in charge, and Democrats are less dovish when Republicans are in charge. Both sides want the economy to be weak when their rivals are in charge.

 

Did the Fed overshoot? It is hard to say, since this was really one of the first times the Fed started tightening without a real inflation problem. The point of tightening was advertised as a preventative move to prevent inflationary pressures from building, but the real reason was to get off the zero bound. 0% interest rates are an emergency measure, and emergency measures aren’t meant to be permanent. Interest rates at the zero bound also cause all sorts of distortions in the markets, and build risks into the system. Given that the economy was strengthening, the Fed took advantage of the opportunity to get back closer to normalcy. Would the economy be faster if the Fed wasn’t tightening? Probably. However some of that is going to be determined by global growth, and Europe is not doing well.

 

Monetary policy acts with about a year’s lag, so the June, September, and December hikes from last year still have yet to be felt. Nobody is predicting a recession, but the 2018 hikes are going to sap growth a little this year. I would be surprised if it slowed down the economy enough to prod the Fed to cut rates. Note that the NY Fed raised its Q2 growth estimate to 2% from 1.6%.

 

Finally, even if the Fed raises rates, overall long-term interest rates can stay low for a long, long time. Interest rates went below 4% during the Hoover Administration and didn’t get back above that level until the Kennedy Administration. So, it could be a long time before we ever see a 4% 10 year yield.

 

100 years of interest rates

 

 

22 Responses

  1. Millennial socialists are going to get tiresome pretty quickly when it comes to employing economic terms that they either A) don’t understand what they actually mean, or are B) being disingenuous about because it plays to the preconceptions of their target audience:

    ““Got it,” Buttigieg responds. “Wow, this needs resurfacing. There’s a Nobel Prize waiting for someone who can figure out how to make asphalt last longer than 12 years. I’m not kidding. I really think there ought to be a Manhattan Project for this. It’s classic market failure.”

    If Buttigieg becomes president, you sense, the future will be chock-full of Manhattan Projects.”

    https://www.washingtonpost.com/news/magazine/wp/2019/01/14/feature/could-pete-buttigieg-become-the-first-millennial-president/

    People already know how to make roads that last longer than ten years, starting with the Romans several thousand years ago. Shitty roads built by the government isn’t a “market failure”. It’s a policy choice.

    See also: High speed rail failure in California.

    Like

    • I could write a book on the idiocies of the left.

      Like

      • There are a lot of people (and not all on the “left”, but ideology becomes less meaningful when the ideologue does not understand their own assumed ideology) who just like to run their mouths. They don’t understand the precepts or history of their own ideology, much less the opposing ideology. AOC comes to mind.

        Like

    • He’d need two Manhattan projects, one for the new road surface and the other for all the displaced asphalt workers.

      Course, we only have 12 (or, according to Beto – 10) years left so who gives a shit?

      Liked by 1 person

    • I must be officially old (or at least middle aged) since the earnest attitude of the young “Why didn’t anyone ever think of this?” is now officially annoying.

      Especially when their go to explanation is that capitalism is the reason for every bad thing in their lives. Down to pot holes.

      The last thing I want to see is the Vox crew in power.

      Liked by 1 person

    • It’s classic market failure.

      I’m with him until then. I’m all for finding a way to make asphalt last longer than 12–or sometimes 6, or sometimes 3–years. But not having discovered that magic bullet yet isn’t a frickin’ market failure. I’m all for better road design (I understand why the upfront cost of making road from quarried rock is not cost effective for states, but the Roman solution is always there).

      Like

  2. I think we should apply this approach to accountability to United States Senators as well.

    https://slate.com/technology/2019/04/elizabeth-warren-equifax-cambridge-analytica-regulation-data-privacy.html

    If a law that they sponsor or co-sponsor doesn’t do what they said it would, then throw them in jail.

    Liked by 1 person

  3. The need to straw man Pence is the equivalent of a hoax hate crime report.

    Like

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