The Federal Reserve has spoken.
On Wednesday, June 11, the central bank held the Fed Fund rate at 5.25%-5.50% – the highest level in 23 years.
That wasn’t much of a surprise…
The market had widely expected the Fed to hold rates steady. What was more interesting was the “assessment of appropriate monetary policy,” known as the “dot plot.”
The consensus seems to be one cut this year, down from three.
Technically, eight officials still expect two, seven predict one, and four don’t see any happening at all. And since we’re in the middle of June now without a single cut announced…
It’s safe to say the chances of multiple cuts are narrowing by the month.
Even so, I haven’t changed my call. The evidence that I see still points to two cuts, and I have no problem saying so.
To understand why, let me first point out that inflation is showing to be pretty steady this year. Consumer prices rose 3.4% year-over-year in April and then 3.3% in May, as we learned last week.
In remarks to the press, Fed Chair Jerome Powell refused to offer much guidance on what to expect from here, saying only that “we can’t know what the future holds.” He’s still very much focused on getting inflation down to 2%.
But as has been the case for the past few FedSpeak meetings, Powell is worried about “two-sided risks.” In other words, what’s the risk of waiting too long to reduce rates?
I’ll give Powell this: He understands that cutting too much or too soon could bring inflation roaring back. If the Fed cuts too little or too late, more people will suffer than necessary.
I get it. I don’t usually feel bad for central bankers, but I’ll admit it’s a tough situation to be in.
Powell understands his legacy is on the line. He’s already botched things more than once in the past four years.
“Transitory” inflation, anyone?
Powell’s played a good game so far. But I still believe two rate cuts are coming this year. And it’s for a very simple reason…
Don’t Forget It’s an Election Year
I expect one rate cut before November and one more to close out the year. And that’s because there’s an election coming up.
A presidential one.
Biden isn’t looking great in the polls right now. Not with men. Not with African Americans. Not with Gen Z. Not with Hispanics. Not in many swing states.
A recent forecast from 538 – a polling aggregator – was interesting. Out of 100 simulations, President Trump wins reelection 51 times. That’s a slim lead, but a lead nonetheless. And it’s a big change from April when the same projections showed President Trump only winning 41 times in 100 simulations.
That’s a big turn. And it’s bad news for Team Biden. And it’s not a mystery why it’s happening.
Whatever you think of James Carville, he was right when he said during the Clinton campaign of 1992, “It’s the economy, stupid.”
People aren’t feeling great about their personal finances or the larger country’s fiscal path. They can hear all the jobs reports and news about declining inflation the media wants to put out.
But that doesn’t change how uncomfortable they are with their economic situations.
That’s why Biden needs to do something big to reassure them if he wants to win. And getting the Fed to ease back on interest rates, making at least homeownership a feasible option again, could do a lot.
I know what you’re probably thinking.
“The Fed is supposed to be apolitical.” And you’d be right… in theory.
But real life can be messier, especially when there’s an election on the line.
“My Boys Are Dying in Vietnam”
In actuality, politicians – presidents, mostly – have a long and colorful history of “incentivizing” their Fed Chair.
Nixon spoke to Fed officials no fewer than 160 times in the leadup to the 1972 election. The Nixon tapes show the president leaning on Fed Chair Burns to cut rates ahead of the election.
Clinton sat Hillary next to Alan Greenspan during the 1993 State of the Union. This was a bit of a mini scandal at the time. It seemed like Clinton was trying to “butter up” his Fed Chair.
But the most dramatic exchange has to go to Lyndon Johnson, who – in 1965 – reportedly shoved William Martin and yelled, “My boys are dying in Vietnam, and you won’t print the money I need!”
Could Biden or his surrogates be pressuring Powell to cut behind the scenes? It’s not out of the question. And if that is the plan, they’re not being subtle about it.
A Letter from Liz
Massachusetts Senator Elizabeth Warren, a Democrat, definitely thinks the Fed is malleable. She sent an open letter to “The Honorable Jerome Powell” on June 10, urging his institution to “cut the federal funds rate.”
Warren didn’t mention the election. She’s far too clever for that. She simply said that:
The Fed’s monetary policy is not helping to reduce inflation. Indeed, it is driving up housing and auto insurance costs – two of the key drivers of inflation – threatening the health of the economy and risking a recession that could push thousands of American workers out of their jobs. You have kept interest rates too high for too long: It is time to cut rates.
Ms. Warren isn’t exactly wrong on any of those points. But the fact that a sitting senator told – not suggested, but told – the Fed Chair to cut rates is highly, highly unusual.
Ms. Warren also happens to be head of the Biden campaign’s national advisory board.
That’s quite a coincidence.
The fact that any politician thought it appropriate to write a letter to the Federal Reserve is telling. The fact that Warren did is a greater statement still.
You don’t have to like me saying any of this, but it is what it is.
And I imagine those eight Fed officials – the ones who still expect two rate cuts – factored politics into their playbook.
I know I certainly am. It seems foolish not to face the facts.
Rate cuts are coming. I’m very certain of that. So, plan accordingly.
I’ll make sure to let you know more about what I see here as November approaches. So stay tuned!
You never know when opportunity may strike.
Regards,
Brad Thomas
Editor, Intelligent Income Daily