Monday, 18 November, 2019

Navarro: Fed's Interest Rate Environment Causing Market Slide

BP_James Fed's Bullard Says U.S. Economy Is Sound Despite Trade Uncertainty
Russell Knight | 18 August, 2019, 02:55

Despite the stock market's recent selloff, Bullard sees no need to panic about the US economy.

With economies slowing overseas "you have this flight to safety going on", that is pushing down US rates even though USA economic growth is "reasonable", Bullard said in comments on Fox Business Network that seemed to discount the degree to which recent market volatility may figure into the Fed's next decision on interest rates. "It is much better to be early and aggressive in responding to a slowdown than it is to be late to it".

Sliding bond yields and the inversion of a key part of the US yield curve on Wednesday for the first time in 12 years show that bond investors have a far gloomier outlook for the USA and global economies than the USA central bank.

It is widely expected to cut rates again in September.

"The market is attempting to gauge the extent, duration and magnitude of the fallout from the trade war", said Ian Lyngen, head of US rates strategy at BMO Capital Markets in NY.

Global central banks have decisively switched into easing mode. All we need to do is get the Fed basically to give the right interest rate policy. A recent decline in long-term Treasury rates relative to bonds coming due sooner, an unusual occurrence known as a "yield curve inversion", has preceded recessions in the past and signaled times when Fed policy might have been too restrictive.

Furthermore, if US-China trade relations worsen it could also have a similar effect and push the Greenback higher against its major counterparts.

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At the start of the year, markets and central banks were more optimistic on the global economic outlook.

That shifted in March, however, when the Fed abruptly brought an end to its hiking cycle. That was followed in July by the Fed's first rate cut since 2008.

But Mester said a global flight to safe assets in light of the U.S. Bond markets are priced for two additional USA rate cuts this year and a third in the first half of next year.

As central banks compete for more dovish policies, however, they threaten to cancel each other out, making each move less effective.

The Federal Reserve likely needs to cut interest rates and take aggressive measures to counter an economic slowdown, Minneapolis Federal Reserve Bank President Neel Kashkari said on Friday. Nonetheless, it's certainly paving the way for more volatility than investors bargained for.

A chorus of other central banks including those in India, Thailand and the Philippines also cut rates during the week. U.S. President Donald Trump was quick to slam the Federal Reserve and call the notion of an inverted yield curve "crazy".

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