President Donald Trump now wants the Federal Reserve to cut interest rates to zero or below. However, it should take into account the negative rates of negative interest rates that have not triggered strong growth in Europe and Japan and are likely to trigger a firing storm among US savers. Bond yields have reversed part of their recent sharp falls.
In his recent broadside against the central bank Trump tweeted on Wednesday : "The Federal Reserve should lower our interest rates to zero or less and we should then start refinancing our debt. The interest costs could be lowered and at the same time the duration extended considerably. "The president concludes by calling the Fed" boneheads "because it does not follow other central banks at negative interest rates.
That's the view of the self-proclaimed king of debt. "As a real estate developer with a high level of debt, Trump thinks about negative interest rates from a borrower's point of view," writes Paul Ashworth, chief economist at Capital Economics.
But the Fed was at best lukewarm about such a possibility, "in part because officials know it could provoke outrage among savers and put the central bank in a political vortex," he adds. Money market funds could also face large outflows that could disrupt the short-term financing of corporates, banks and perhaps even the Ministry of Finance.
Also recording negative interest rates in the Eurozone, Sweden, Denmark and Switzerland And Japan was mixed, Ashworth continues. As bond yields fell below zero, banks were reluctant to impose negative interest rates on depositors, putting pressures on their profits.
Trump says the US deserves interest rates below zero as they "have a big currency, power and record." In fact, the negative interest rates reflect the economic turmoil in Europe and Japan. By contrast, US interest rates peaked in real terms in the mid-1980s (ie, adjusted for inflation) when it was "Morning in America".
Long-term government bonds briefly reached 14% in May 1984 – a full 10 percentage points above inflation. Now the real returns on inflation-protected Treasury bills are just above zero. The 10-year TIPS returned 0.14% while the 30-year TIPS returned 0.56%. After taxes, which are levied annually on the inflation adjustment, these returns are already below zero.
Unlike last year, Trump's Fed bashing now seems unfounded. In October of last year, when the central bank was raising its key interest rate and shrinking its balance sheet, and the stock market was heading for a correction area, I wrote that the president had to criticize the central bank for being too tight
Well At the Federal Open Market Committee meeting next week, the Fed is ready to lower its federal funds rate from the current 2% to 2.25%. The futures market for Fed funds expects a likelihood of 88.8% for a 25 basis point cut (a quarter percentage point) and a 72.3% probability for a further 25 basis point or more reduction at its December meeting , The Fed has also ended the shrinking of its balance sheet.
In the meantime, the stock market has recovered, with the
S & P 500
Wednesday, for the first time since July 30, back to the 3000 level. The benchmark was only 0.82% below its record and has risen by 2.54% since the beginning of the month. The
Dow Jones Industrial Average
was only 0.81% off his all-time high.
The rally in September was also marked by an even more remarkable rotation of past market winners, especially dividend-paying, slow-growing defensive stocks to stocks with depreciated values.
While bond yields have dropped from their lows in recent days and the 10-year treasury traded at 1.799% late in Wednesday (down from 1.461% on 3 September), this coincided with the stock market rally in September and finances. A stronger rising yield curve is also a positive economic sign.
Be careful what you want when you ask for zero or negative interest, Mr President.
Write to Randall W. Forsyth at firstname.lastname@example.org