The Federal Reserve has injected $278 billion into the securities repurchase market for the first time. Numerous justifications have been provided to explain why this has happened and, more importantly, why it lasted for various days. The first explanation was quite simplistic: an unexpected tax payment. This made no sense. If there is ample liquidity and investors are happy to take financing positions at negative rates all over the world, the abrupt rise in repo rates would simply vanish in a few hours. Read More
If there is something that is evident is that the United States does not need a rate cut.
With the economy growing at 2.1%, unemployment at 3.6%, creating 170,000 jobs per month, and estimated underlying core inflation of 2%, no objective data justifies cutting rates that are already artificially low. Wages are rising by 3% and credit growth for companies and families is solid. Read More
Consumer confidence is high, unemployment is low and Treasuries’ yield is at 2.1%, while credit to the economy and corporate financing are not suffering.
The weakness in core consumer prices in May, which increased by only 0.1 %, was entirely due to lower prices of used vehicles, and core CPI inflation remains within the Fed target, falling from 2.4% in mid-2018 to 2.0% in May. Headline CPI inflation fell to 1.8% in May due to lower energy prices, so there is absolutely no logic in a rate cut. With unemployment at 3.6%and annualized GDP growth expected to remain above 2.3%, demands for a rate cut are only an excuse to keep financial asset prices higher at any cost
There are some elements that point to a slight weakness in the economy but no need for a rate cut.
Industrial production rose 0.4% m/m in May while it stalled in other global economies.
A strong 0.5% rise in underlying retail sales in May, along with upward revisions to previous months’ gains which means consumption is likely to grow close to 4% annualized in the second quarter.
The headline confidence index declined marginally to 97.9 in June, from 100.0, but remains at very high levels.
A rate cut would only fuel the debt bubble further, and leave the Fed with fewer tools to address a slowdown. When so-called “High Yield” means 365 bps for junk bonds of companies close to bankruptcy and Treasuries yield 2.1% there is no reason at all to cut rates. Rather the opposite.
The debt bubble is dangerously inflated and lower rates would only make it worse. The ratio of US corporate debt to GDP, as well as the high-risk loan figure and securitized debt, have risen to pre-crisis levels. US deficit is rising because spending soars and the government finds debt cheap and abundant. Government spending rose to $440 billion in May 2019, up 21% from May of 2018. Yes, up 21% from May of 2018. All this despite record revenues. Receipts increased to $232 billion, up 7% from the same month last year.
A rate cut would only create a larger problem in the future. If the already dangerous corporate and sovereign debt bubble grow significantly more, no monetary policy will prevent a debt crisis.
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