Pros and Cons of a Rate Cut

Peter is the CIO of Bookmark Advisors, an asset management firm and the Editor of The Boock Report, a macro economic and market newsletter. 

 

Let’s use our weekly “Succinct Summation” format to consider the pros and cons of a rate cut:

Pros:
1. US economic growth has slowed, mostly driven by softness in manufacturing, hurt by tariffs and the threat of more;

2. BLS data shows Job growth = zero in May (if we include the downward revisions to 2 prior months).

3. Business Roundtable / Duke CFO survey, business confidence is waning.

4. Only the Fed is worried about not achieving a 2% core PCE rate but if they feel they need a reason to cut, they’ll rely on this.

5. Yield curve inversion is screaming for a cut, which would re-steepen the curve.

Cons:
1. The Fed should do nothing until they see what comes off the newly heightened tensions between the US and China.

2. Credit spreads are near record lows and the stock market is near record highs. Are they discounting good times ahead or are markets just responding to hopes of a cut and the Fed and the markets are just chasing each other in circles?

3. Rate cuts from here would further inflate the everything asset price bubble and not help economic growth;

4. The unemployment rate is at just 3.6%. The all in U6 rate is down to 7.1%, the lowest since October 2000.

5. GDP growth in the first half of 2019 should still be about 2.5% on average.

6. The bond market has already eased for the Fed making cuts in the short end irrelevant in terms of encouraging more borrowing which in turn would lift growth.

7. Long rates are falling sharply leading to the inversion because they are getting dragged down by almost $12 Trillion of negative yielding securities overseas.

 

FOMC Meeting results today, FOMC announcement tomorrow at 2:00pm; presser at 2:30pm