As usual, Powell (Federal Reserve) let us down [Trump Tweet]

Twitter ^ | 07/31/19 | President Trump

[Moonman62]

What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world ...

As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place - no inflation. We are winning anyway, but I am certainly not getting much help from the Federal Reserve!

[TheTimeOfMan]

The West has backed itself into a debt corner from which it cannot escape.

The only way out is default or a massive tax in the form of heavy inflation.

I’m not sure what Trump’s long game is here. I suspect there is not one and this is just him wanting to keep the economy cooking into the election.

[Pearls Before Swine]

I agree. But, considering the alternatives, I understand his stance. But, of course, I’d like to also think past 2024.

[Moonman62]

Trump’s long game is to grow the economy and reduce the influence of the corrupt Federal government and a Federal Reserve that’s wrong about economic growth causing inflation.

You may want to reconsider your claim that the West is doomed.

[Wuli]

I am sorry President Trump but the economy does not need another stock market or real estate bubble. One, the other, or both is the likely result of rate cuts right now.

The economy did not need a rate cut. It needed the Fed to hold steady.

[Moonman62]

The economy did not need a rate cut. It needed the Fed to hold steady.

...

The economy needs a rate cut because the Fed is manipulating rates to be higher than what the market would charge. They do this because of their false claim that economic growth causes inflation.

President Trump’s reasons given in his Tweet are valid as well.

[InterceptPoint]

The West has backed itself into a debt corner from which it cannot escape.
The only way out is default or a massive tax in the form of heavy inflation.
I’m not sure what Trump’s long game is here. I suspect there is not one and this is just him wanting to keep the economy cooking into the election.

Bingo. We are sacrificing the value of our savings to keep the interest low. Inflation just got a steriod shot in the rear end.

Is it worth it to ensure a Trump 2nd Term? Actually, I think so and I'm a really hard over on the subject of inflation and The Fed creating money from nothing, flooding the market with it and collecting interest to boot.

I think Trump understands this. He is a real estate guy. He knows about inflation.

A tactical decision by Trump. I believe he knows better.

[Wuli]

“The economy needs a rate cut because the Fed is manipulating rates to be higher than what the market would charge.”

Sorry. Not true at all. The Fed rate is too low already and housing prices are already too high - over valued - in too many markets. Lower interest rates will just make housing a bubble market again.

[Drago]

Yep, interest rate manipulation to bail out The Swamp’s deficit spending has to end. The Fed let us down by not raising the rate by a quarter to half a percent.

[Moonman62]

Wages need to catch up with the real estate market. That won’t happen with the Fed slowing down the economy.

[jdsteel]

1) The US is part of “the West” but we are in a vastly different situation. Yes, our debt is growing (damn it) but so is our economy, and we remain at 100% debt to GDP ratio. Better by far than the rest of the developed world...and China.

2) This rate cut was unnecessary for the US economy, but useful to defend, at least a little, from the monetary devaluation of other nations. A strong dollar hurts our economy more than it helps it.

3) THE most important economic calculation right now is whether or not Trump gets re-elected. He’s done a tremendous job, almost on his own. A second term will be a game changer for the next 50 years.

[Moonman62]

Yep, interest rate manipulation to bail out The Swamp’s deficit spending has to end.

...

The government pays too much on the debt because the Federal Reserve is keeping short term rates above what the market would charge. Rates should be cut more.

[Bratch]

MAGA Irrelevant – Federal Reserve Cuts Rate Quarter Point, First Since ’08 – Why It Doesn’t Matter…

Posted on July 31, 2019 by sundance

In 2015 CTH outlined how candidate Donald Trump’s proposals were in-line with those who had long argued for a return of “economic nationalism”.  We also outlined when those proposals (now policy) are implemented, Fed action would be essentially irrelevant.

The Federal Reserve is pegged to the Wall Street Economy.  President Trump’s policies are pegged to the Main Street Economy.  There is a disconnect; a new dimension in U.S. economics; and very few people understand what happens in this space between them.

Thirty-five years ago Fed monetary policy impacted the U.S. economy directly because almost all activity (durable good manufacturing) was within our borders.  The natural dynamic of inflation could be influenced by the Fed.  Rate changes could offset inflation and also enhance domestic investment etc.

However, as time progressed that manufacturing activity -the basic underpinning of middle-class jobs, wages etc- shifted overseas.  When monetary policy became controlled by multinationals (Wall Street influencers purchasing politicians), capital investment moved to generate purely higher profits.  Businesses, specifically manufacturing, went abroad.  As a consequence the determination of prices, ie ‘inflation’, was no longer influenced by the Fed because the actual economic activity was/is outside the U.S. borders.

We see this today.

President Trump’s middle-class policy, through tariffs, is intended to bring manufacturing back to the U.S.  China and the EU are trying to keep their manufacturing foothold by devaluing their currency and subsidizing their industries.

This action by China and the EU lowers the value of their currency, increases the value of the dollar, and simultaneously lowers the prices of their exports.  This offsets the U.S. tariffs, and the China/EU stuff costs less to import.  In essence, we import deflation.

No action by the U.S. Fed can change this pricing mechanism because the price determination is outside the reach of the Fed.  Hence, the disconnect.

NEW YORK (Reuters) – The U.S. dollar rose to two-year highs on Wednesday after Federal Reserve Chair Jerome Powell, having made the first cut to interest rates since 2008, signaled the move was not the start of a rate-cutting cycle.

[…] In a widely expected move, the U.S. central bank cut rates by 25 basis points to shore up the economy against risks including global weakness. But in the subsequent press conference, Powell said he viewed the cut as a “mid-cycle policy adjustment” rather than a broader loosening of monetary policy.

[…]  The statement upended expectations of some market participants who anticipated confirmation of further rate cuts. A day prior, traders had forecast at 35% chance of three cuts by the end of the year; on Wednesday afternoon that figure had fallen to 12%, according to CME Group’s FedWatch tool.

“They acknowledged strong labor markets, recent reasonable signs of moderate growth. It still leaves the playing field wide open as to what they’re going to do in future months,” said Tony Bedikian, head of global markets at Citizens Bank in Boston. (more)

♦ RATE CHANGES –  Currently multinational investment is in a holding pattern, waiting to see what happens with President Trump’s global trade reset.  Manufacturing multinationals don’t know exactly where to put their investment money because they are waiting to see what happens with trade and tariffs.   They don’t want to invest in a new China factory only to see the end product become subject to POTUS Trump tariffs.

The Fed views those stalled investment dollars through the prism of a global economy, their historic reference.  Financial pundits have also been selling the global economy model for 35 years; so they too mistakenly view stalled (unappropriated) investment dollars as a sign the U.S. economy might be weakening.  It ain’t.

We are in the aforementioned flux space where Trump is favoring Main Street…. and all trade policy is shifted therein.

U.S. Federal Reserve lending rates won’t make the multinationals move their investment money until the geopolitical trade reset is worked out.  Ergo, lower Fed rates won’t currently help Wall Street…. Nor will lower Fed rates have much impact on Main Street because internal U.S. economic influences are larger and stronger than the Fed influence.

Because the Fed cannot influence prices of manufactured goods, the Fed cannot influence inflation.  The U.S. worker wage rates are stronger than any inflation; again the disconnect that CTH has noted for three years that will work in favor of the middle-class.

So long as the Fed is pegged to Wall Street, meaning has primary focus on lending to U.S. manufacturing multinationals; and as long as that lending (investment) is stalled pending the outcome of Trump’s trade and economic reset; the Fed is essentially irrelevant on the bigger dynamic.

If a variable rate mortgage loan goes up by $100/month, and simultaneously (outside of the Fed influence) the worker is getting a $300/month wage increase (currently 5.5% wage growth), there is no material negative impact.

If a variable rate mortgage loan goes down by $100/month, and the worker is still getting a $300/month wage increase, blue collar spending and savings jumps [current status], no substantive downside.   The blue-collar spending is a self-fulfilling prophecy. This is the reason why we noted in 2016 the Fed would essentially be irrelevant to Main Street.

The Fed remains pegged to Wall Street.

Trump policy remains pegged to Main Street.

We are in the space between.

Until this dynamic changes and the majority of the underlying economic activity is returned to the U.S action by the Fed is essentially moot to Main Street.

Once the U.S. economy rebalances; meaning once the trade policy brings more production based manufacturing and assembly back into the U.S; and once we reverse the 35-year Wall Street dynamic and become a more production-driven economy (where the best return on investment is inside the USA); then yes, Fed action will start to have influence.

When? Once the USMCA is ratified, President Trump will trigger tariffs on China. This will move all of the multinationals who are in a ‘holding pattern’ because they will see what areas are safe.  Capital investment will flow very fast.

Where? The China exodus will benefit North America (USMCA) and those ASEAN nations who have partnered with Trump and made proactive trade agreements.  That’s where the capital investment will flow.

 

[Moonman62]

2) This rate cut was unnecessary for the US economy, but useful to defend, at least a little, from the monetary devaluation of other nations. A strong dollar hurts our economy more than it helps it.

...

Correct. Other nations refuse to use tax and regulation cuts to stimulate their economies. They want to use monetary policy exclusively which isn’t working.

[Wuli]

The economy is not slowing down now, with the Fed rates as they are. Wages have been catching up for two years in a row now. Wages are actually on a roll. One of the biggest areas of mortgage finance growing recently is refinancing. That happens when two things conjoin - market values have gained considerably, producing “equity”, and interest rates are “good”. When refinancing is on an upswing we are in or near a housing bubble. Nothing in the economy indicates it is slowing down too much.

[Wuli]

ROFWL

1. Wages have been very much up. 2. But lower interest rates will affect housing - upping market values, a lot more than it will wages. With the Fed printing more money housing will get even more expensive for 1st time buyers, not less. 3. Investor buyers jump in with the cheaper financing, hoping they will be able to sell before the fed’s bubble bursts, just like they tried to do last time. 4. Homeowners will refinance more, take any additional equity in cash, adding more spending money to corporate revenue already NOT hurting.

Shades of 2006 all over again.

[Drago]

Incorrect, interest rates (prime rate) were a full 3 percentage points higher than they currently are during one the best periods of GDP growth in U. S. history (late ‘80’s). Prime rate should be in the 9% range right now, instead of 5%. We don’t need an inflation “target rate” of 2-4%. 0% should be the goal. Running more like 6.5% right now.

https://www.jpmorganchase.com/corporate/About-JPMC/historical-prime-rate.htm

https://www.thebalance.com/us-gdp-by-year-3305543

[central_va]

The only way out is default or a massive tax in the form of heavy inflation.

The founding fathers would know what to do in a financial mess like this. They'd put up a 25% import tariff and raise it 2% per year until both the trade deficit and budget deficit were zeroed out.

[Moonman62]

Incorrect, interest rates (prime rate) were a full 3 percentage points higher than they currently are during one the best periods of GDP growth in U. S. history (late ‘80’s).

...

You’re incorrect because you’re not using the current yield curve to determine market rates.

[Moonman62]

President Trump is right and I’m right. Where does that leave you?