Investors Starting to Consider Possibility of Fed Rate Cut
My how things change.
This time last month, it was a foregone conclusion that the Federal Reserve was going to raise rates in June. Then the government released a shockingly bad jobs report and suddenly that rate hike was taken off the table. Even so, many pundits believed July would finally bring the much anticipated boost in the interest rate. But in the wake of the UK’s decision to leave the EU – that one is pretty much off the table as well.
In fact, many analysts now believe Janet Yellen won’t boost rates at all in 2016.
Peter Schiff recently appeared on CNBC’s Trading Nation and said the Brexit vote was “just what the doctor ordered as far as getting her out of jail free,” because now Yellen has the perfect excuse not to raise rates.
She keeps talking about the fact raising rates is appropriate because the economy is strong, but the reason she can’t raise rates is because she knows the economy is weak. And so, this gives her the perfect excuse.”
But Peter took things a step further, saying Yellen could even use the Brexit as a rationale to cut interest rates. In fact, Peter has argued for months that not only will the Fed not raise rates, it will soon cut and launch another round of quantitative easing. Peter made this very case right after the May jobs report came out in his SchiffReport Video Blog.
Wait until the conversation turns to rate cuts. Wait until the conversation turns to QE4, or negative interest rates. Wait until people think that I was right from day one, that the Fed checked us into a monetary roach motel, that there is no way out of this monetary policy.”
Well now Peter isn’t the only one talking about the possibility of a Federal Reserve interest rate cut. A MSN Money article took the idea mainstream:
As the world grapples with the uncertainties following Friday’s Brexit vote, questions have begun to emerge among investors as to whether the Federal Reserve may need to reverse its tightening plan and cut interest rates.”
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Investors are starting to consider the idea as well. Interest-rate futures, a place where hedge fund and money managers bet on the Fed’s future policy moves, now shows a 6% chance the Federal Reserve will slash interest rates to .25 basis points next month. That compares with zero on the Thursday before Brexit.
Analysts say speculation about a rate cut underlies growing anxiety that the fallout from Brexit could undermine growth in the US economy. And that could lead to a policy shift by the Fed.
There are also market signs a rate hike isn’t in the cards, and a cut may well be, according to MSN:
The yield on the two-year Treasury note, highly sensitive to the Fed’s policy outlook, fell to 0.594% recently from 0.653% Friday and 0.779% Thursday. That is just slightly above the Fed’s policy rate range of 0.25%-0.5%, another sign many investors don’t expect the Fed to raise rates for the foreseeable future.”
Of course, there is evidence the US economy is not growing and may actually already be in a recession. That’s why Peter keeps saying Yellen really wants to lower rates, but has boxed herself into a corner because a rate cut would acknowledge the economy is weak, and that would not go over well in an election year.
With Brexit, Yellen may have just the excuse she needs.
Photo by DonkeyHotey via Flickr
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