Trump Calls On Fed To Cut Rates By 1%

Despite coming under widespread criticism for such incidents in the past, Trump has once again publicly declared his views on how he wants the Fed to act. Taking to his favorite medium of Twitter, the US president wrote yesterday that:

 “The Fed Rate, over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well. If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced-good for everyone!”

Trump has consistently attacked the Fed over its monetary tightening over the last year. When the Fed was finally forced to cut rates in July due to the negative economic impact from Trump’s trade war, the president bemoaned the .25% cut saying the bank should have opted for a larger cut.

Many, from across the political divide have scorned the president for attempting to influence the Fed’s decision making. Indeed, earlier this month the Wall Street Journal published an open letter signed by four former Fed chairmen. They called for the independence of the Fed to be maintained and for the bank to be able to act free from political pressure.

Given the fresh escalation in trade tensions between the US and China, and the negative impact inflicted on the global economy, expectations of further easing from the Fed have increased recently. Last week, movements in US treasury yields raised fears about an imminent recession in the US. The yield on 2Y USTs moved above the yield on the 10Y note for the first time since 2007. Typically, such a move has tended to precede a recession in the US.

Key Comments

However, Trump and his team have been quick to dispel rumors of a recession. They continue to reassure the public that the economy is in good health. White House adviser Larry Kudlow said:

“I don’t see a recession at all…Consumers are working. At higher wages. They are spending at a rapid pace. They’re actually saving also while they’re spending – that’s an ideal situation.”

These comments were echoed by White House Adviser Pete Navarro who said:

“We have the strongest economy in the world and money is coming here for our stock market. It’s also coming here to chase yield in our bond markets.”

Indeed, the president himself told reporters:

“We have the strongest economy, by far, in the world.”

Market Looking For September Rate Cut

The market is widely expecting the Fed to cut rates again this year. This is despite the Fed downplaying the prospect of further easing when it cut rates in July. However, given the deterioration in global conditions since then, market pricing is increasingly reflecting the view that the Fed will cut rates at its next meeting on September 18^th. This will come with further rate cuts expected over Q4. At this point in time, the market is only looking for a further .15% cut. Therefore, the question is whether the Fed will cut rates in line again, or opt for a bigger move?

Technical Perspective

The USD Index continues to grind higher within the rising wedge pattern which has framed price action since Q3 2017. However, momentum has started to wane over recent months with price struggling to break above the 98.22 level. The RSI indicator is also flagging bearish divergence. This is highlighting the risk of a reversal lower in the medium term. To the downside, the main support levels to watch are sitting at 94.87–95.42. A break of these levels would pave the way for a much deeper move lower in USD.