Not so fast — interest-rate cuts are not a done deal, experts at Fed conference say - MarketWatch

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Fed Chairman Jerome Powell speaks during a conference at thee Chicago Fed on Tuesday.

The Federal Reserve gathered experts in Chicago this week to talk about the long-term strategy of monetary policy.

But the short-term view took over the chatter from the sidelines of the conference, specifically the next few months and whether market expectations of interest-rate cuts will be self-fulfilling.

Financial markets are now pricing in three rate cuts by January, according to CME Group’s Fed Watch tool, a view that sent stocks sharply higher on Tuesday and left stock futures pointing to additional gains Wednesday.

Some experts at the Chicago conference think the market is overstating the downside risks to the economy from the trade tensions.

“I have a hard time rationalizing where markets are relative to my assessment of what the data is telling us and what I think the risks are,” said Lewis Alexander, chief U.S. economist at Nomura.

“I don’t have a recession in my outlook. I don’t think the data supports that,” he added.

“If you put the blinders on and ignore financial markets and just focus on the data,” you wouldn’t be expecting rate cuts, Alexander said.

“I have a hard time rationalizing where markets are relative to my assessment of what the data is telling us and what I think the risks are.”

Lewis Alexander, chief U.S. economist for Nomura

Joe Gagnon, a senior fellow at the Peterson Institute for International Economics, said he sees very little chance of a recession in the next year.

“Normally you get a recession either because inflation is too high and the Fed has to fight it, and that’s not there, or risks in financial markets that are undercapitalized and would cause panics, and I don’t think we’re there yet,” Gagnon said.

Peter Hooper, chief economist for Deutsche Bank Securities in New York, said he was “holding off” forecasting rate cuts, awaiting more date on the health of the economy.

But the drumbeat for Fed easing continues to build.

Former Treasury Secretary Larry Summers, writing in the Washington Post, said that if the Fed moves slowly on rate cuts, it would be “a grave error.” He called for the Fed to cut interest rates by 50 basis points over the summer and “by more if necessary” in the fall.

Related: Summers goes from mocking to joining rate cut call in two months

Opinion: This yield curve expert with a perfect track record sees recession risk growing

Ethan Harris, head of global economics research at Bank of America Merrill Lynch Global Research, said President Donald Trump’s aggressive trade stance toward Mexico was the pivotal event that triggered expectations of rate cuts. Picking a fight with a close ally on trade showed that the risks to the outlook continue to build, he said, calling it a “no-mas moment,” for financial markets SPX, +2.14% TMUBMUSD10Y, -2.51%  .

Harris now expects three quarter-point interest-rate cuts by January.

Most Fed officials have not committed to voting for a cut. Only St. Louis Fed President James Bullard has said that a rate cut may be warranted soon.

Dallas Fed President Rob Kaplan said in an interview with the Wall Street Journal that he wants to see if the escalation in trade tensions with Mexico will be prolonged before deciding whether the central bank should cut rates.

Chicago Fed President Charles Evans said the market is seeing something that he hadn’t seen yet and that he was comfortable with the current stance of monetary policy.

Economists who think the Fed will cut interest rates generally don’t believe the central bank will move at its next meeting on June 18-19.

Krishna Guha, vice chairman at Evercore ISI, said Fed Chairman Jerome Powell on Tuesday previewed the central bank’s likely message to the markets after its June meeting.

Powell said the Fed was “closely monitoring” the implications of trade developments for the U.S. economic outlook and would “act as appropriate to sustain the expansion.”

Read: Powell says rates could be cut if trade tensions damage economic outlook

“This was the preview. This was the statement language,” Guha said.

The stock and bond markets keyed in on a pledge for action. The Dow Jones Industrial Average DJIA, +2.06%   rose over 500 points Tuesday after Powell made his remarks. The 10-year Treasury yield carved out a fresh 21-month low on trade uncertainty, deepening its inversion to shorter-term rates.

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https://www.marketwatch.com/story/fed-interest-rate-cuts-are-not-a-done-deal-experts-say-2019-06-05

2019-06-05 12:08:00Z
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