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Wednesday, June 19, 2019

Fed...

Although I believe the Fed ought to cut rates as a preventative move (if I put aside my heterodox views on interest rate policy), I found it very unsurprising that the Fed did not budge this meeting. One interpretation of the news flow is that the Fed is setting up for a cut in the next meeting, but my bias is that they will wait. A few strong data points will reduce the pressure to cut.

Since I am not in the forecasting or investment recommendation business, I am not the best person to ask what the Fed will do over the next few meetings. I just want to note that the historical bar for rate cuts now is quite high; the only question is whether Powell is more flexible, which would break the continuity of the Fed's policy stance.

4 comments:

  1. Kind of tough if you're not sure that cutting interest rates increases spending or does the opposite.

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    Replies
    1. If you’re central bank watching, you gotta think like a central banker, or other central bank watchers. So I put on my “conventional economist hat” when writing about Fed policy. I’m agnostic on the exact effects of interest rates, so I’m not too deeply concerned about this.

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    2. I wasn't trying to be critical Brian. At this point the only thing I think I know is that if the Fed cut their interest rate target then the bonds you might presently hold might be worth more if you sold them. And I'm not even sure about that.

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    3. Yes, normally rate cuts are good for bond prices. However, even that’s murky. Bonds rallied already (yields down, prices up) because of expected rate cuts; it’s theoretically possible they go the other way once the rate cut materialises. That’s fairly rare for cuts, but happened for rate hikes. (“Bernanke’s conundrum.”)

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