The Fed Open Market Committee concluded its two-day meeting on Wednesday by cutting the target Fed Funds rate by 25-basis points. This is exactly what the majority of investors and analysts thought they would do and most thought it is what they should do. However, President Trump was not one of those in the majority and he immediately went on the offensive on Twitter.
The Fed announcement came at 2:00 PM EST and at 2:25 we got this tweet from President Trump:
“Jay Powell and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!”
The first reaction by investors took stocks lower and the S&P was down over 1% at the lows of the day on Wednesday. However, once Chairman Powell started speaking at his post-meeting news conference, stocks rallied and the S&P made up all of the loss by the end of the day.
During the press conference, Powell referred to the cut as an “insurance cut” that was made in case some of the risks they have been seeing start to worsen. The chairman also indicated that they would continue to monitor the economic indicators and let those determine whether any more rates cuts were needed this year. Essentially he left the door open for the possibility of another cut, but he didn’t indicate the need for one.
The results of Wednesday’s voting were rather interesting. There were seven members that voted for a cut, one that wanted a 50-basis point cut, and two that wanted to leave the target rate at the target range of 2% to 2.25%. The so-called “dot plots” showed that only seven out of 17 members saw another rate cut coming by the end of the year while five saw the current level being appropriate, and five stating that they didn’t see the need for yesterday’s cut. Not all of the dot plots are voting members, so we need to keep that in mind, but based on these figures it looks like another cut is anything but certain.
Personally, I am in the camp that thinks we didn’t need the cut this week. The economy grew by 2% last quarter and inflation is under 2% while the Fed Funds rate was at 2%. That is pretty well balanced in my book. Of course, we would like to see a higher GDP growth rate with inflation remaining at its current level, but as long as the GDP growth rate is higher than inflation—that’s a good thing.
I know many of the readers of Bull Market Rodeo lean to the conservative side and I make take heat for this comment, but President Trump is wrong about the Fed. Chairman Powell and the committee are doing precisely what they need to do. They have made two cuts this year and they are taking a measured approach to the future. The Fed is doing its job—maintaining stable prices and maximizing employment, the dual mandate Congress gave the Fed in 1977.
President Trump has bashed the Fed on numerous occasions and, in my opinion, those attacks were unwarranted. Why Trump thinks the Fed should cut rates to zero is beyond me. Just because the European Central Bank has negative interest rates doesn’t mean we should too. Their economy is much weaker than ours.
Trump used the attacks on Saudi oil production facilities as another reason to call for a rate cut, but that is the exact opposite of what economic theory states a central bank should do. Monetary theory uses rate hikes to combat inflation, not rate cuts.
If the Fed continues to cut rates while our economy is growing, it will have far fewer tools to work with if the economy enters a recession. What’s so hard to understand about that?
I heard one analogy that really hit home for me. I have coached basketball off and on for over 30 years now and a guest on Bloomberg TV compared the Fed rate cuts to timeouts in basketball. You only get so many of them each game and you don’t want to use them all in the first half in case you need them down the stretch when the game is close.
That is the perfect analogy for me. Now let’s hope President Trump realizes that the Fed is doing its job and stops bashing them for doing the right thing. They are saving their tools for when they need them the most.