WASHINGTON / NEW YORK (Reuters) – Risk appetite is the rage since the Federal Reserve ended interest rate hikes late last year. US equities are back to a record high and investors are raising the lowest corporate debt, with only a small amount of additional risk to offset.
Traders work on the New York Stock Exchange (NYSE) on April 18, 2019 in New York (USA). REUTERS / Brendan McDermid
This relaxing mood on Wall Street may be welcomed by a president who has been in office for some time, calling for a rate cut by the Fed after markets fell sharply last year, and complaining that it is even wrong to pause at the current level.
But if anything, the "pause party" on Wall Street makes it even less likely that the US Federal Reserve lowers interest rates. Recent positive news on retail sales and exports, which have eased concerns over a slowing economy, argue for a rate cut.
Investors have at least received the message and have been projected by the projection of a rate cut later this year to only 50-50, after which the Fed will give way to early 2020.
Wall Street celebrates the Fed & # 39; & # 39; pause tmsnrt.rs/2VRQYqp
The financial markets are, according to some analysts, an indication that the Fed's rate hikes over the past year have been just right, allowing the economy to continue growing and risks to be kept in check. A rate cut at this point would only raise problems.
"The argument why they should keep the possibility of a rate hike on the table is for reasons of financial stability," said Citi chief economist Catherine Mann in a speech on Wednesday before a conference on financial stability at the Levy Economics Institute of Bard College ,
After a decade in which the interest rate is close to zero, it is "crucial to build a constellation of assets that carries risks in order to achieve a more stable financial market," she said, noting that both stock prices and even the low-yield yields are a market that remains too hopeless.
US President Donald Trump, White House Chief Adviser, Larry Kudlow, and the Fed's nominee, Stephen Moore, have argued in their criticism of the Fed that lower interest rates would enable faster growth and Trump's business plans To be in harmony. They claim that, given the low risk of inflation, the central bank does not need to "insure" against it by keeping interest rates where they are.
This analysis overlooks concerns about financial stability, which have been continuously involved in Fed policy since the 2007-2009 financial crisis. Mann spoke at a conference that was named in honor of economist Hyman Minsky. He examined how financial surplus can build up in good times and catastrophically recover. The downturn a decade ago showed how deeply this dynamic can frighten the real economy.
Financial stability is not a formal mandate for the Fed, which, in accordance with the legislation of the Congress, is to maintain the dual objectives of maximum employment and stable prices. However, since the crisis, the central bank has concluded that maintaining the financial markets is an indispensable prerequisite for achieving the other two objectives.
This does not mean the end of volatility or a guaranteed profit, but rather that the risks are adequately valued and the use of leveraged investments made with borrowed money is kept within safe limits.
Keeping track of equity valuations tmsnrt.rs/2Dr6u5z
This is a major reason why even policy-makers focused on maintaining a high level of employment, such as the president of the Boston Fed, Eric Rosengren, sometimes comment in favor of Hawkish have decided rate increases. The worse outcome for workers, Rosengren and others, would be to over-inflate and collapse markets, even though this means risking slightly higher unemployment in the meantime.
The markets are currently "a little rich," Rosengren said in recent remarks at Davidson College in North Carolina.
Although this is not enough to justify a rate hike, he speaks against a rate cut. Overall, Fed officials, including Chairman Jerome Powell, say they are keeping financial risk within manageable limits, which policymakers believe has been supported by past rate hikes.
The financial market situation is "something the Fed is struggling with," Rosengren said. "It is appropriate that interest rates be paused now."
The valuations of corporate bonds look frothy. Tmsnrt.rs/2VU0Yj3
coverage by Howard Schneider and Trevor Hunnicut; Edited by Dan Burns and Andrea Ricci