Journalist: The Fed meeting has begun. As never before since the pandemic, the central bank is ready to cut rates. But we think we know that it will not be this Wednesday but at the meeting that follows, in September. Why leave for the future what can be done today? Powell and his people, don’t they want to surprise us?
Gordon Gekko: That’s what communication is for, forward guidance, so that there are no surprises. And the Fed used communication with great generosity. We are not reading their minds, but their words.
Q: If you want to raise rates on Wednesday, please let us know.
Q: Unless the FED itself was surprised first.
GG: We have a history of this. In 2022, rates had to be raised in leaps and bounds. But that is not the case. Today there is no urgency.
Q: Or when the regional banking crisis broke out in March of last year.
GG: Well, in that case the Fed did not deviate from the script. It is not very different from what is happening now, but with a different sign. Inflation calmed down in April. It hit the brakes since May. The labor market is slowing down, although it is growing at a healthy pace. Nothing new.
Q: All the ingredients are there to bring rate cuts out of their box.
GG: That’s clear. Although the Fed, if it waits until September, as it hints, will have the benefit of reading Monday and Tuesday’s newspapers. It will be able to examine sensitive information for a couple more months.
Q: And you prefer to take that precaution rather than decide now. You might regret it, right?
GG: There is always a risk that unforeseen events will arise.
Q: You only have to read the piece written by William Dudley to detect a threat. If we focus on the unemployment rate, we are not far from a turning point, as Mary Daly said at the time. Unlike Dudley, who is no longer a public servant, she is the president of the San Francisco Fed.
GG: The message of leaving the cut to September when it could be done today is that there is no imminent danger. On the contrary, we are on the right track, we are not close to any abyss, much less a recession. And that is why we can wait, analyze the information and act when appropriate. Nothing happens if it is resolved in September and we prepare for then with better foundations. In passing, it is emphasized that neither politics, nor what Donald Trump says, conditions the decision.
Q: We are not in a hurry so that Trump does not get upset in September, when the electoral race is at its climax.
GG: That’s right. Of course, the rate cut could be triggered now. However, doing so without giving prior notice would be taken as a sign of desperation. And that is not the case. In fact, the rate cut could have been carried out on May 1st and it would not have been a mistake. What’s more, financial conditions – the stock market and long-term interest rates – have already eased some time ago.
Q: In other words, the expected effects of a rate cut are already operating before they are lowered.
GG: There is no doubt. And that is why there is no hurry.
Q: The July jobs report is due on Friday. If unemployment rises, won’t the Fed regret having postponed its decision?
GG: If employment increases, if labor participation grows, which is the movie we are watching, there will be no complaints. The fact that the labor market is cooling down is not a sign of alarm because the market is overheated. It is rather part of the soft landing process that the FED must achieve.
Q: The yield curve inverted two years ago. A typical sign of a recession imminent. And now it is about to return to its normal slope. That is, long-term rates are higher than short-term rates. What is the Treasury curve telling us? That the risks of a recession are receding? Dudley wanted the rate cut to take place this Wednesday to respond to the sustained rise in unemployment. In other words, he sees a danger of recession. What are we left with?
GG: Believe it or not, they both say the same thing. The curve predicted a recession two years ago. Sahm’s rule, which has not yet been fulfilled, warns us to be careful. The fact that the curve normalizes does not take away from what was said. It usually happens when the Fed lowers interest rates. Which often happens because a recession is upon them.
Q: That doesn’t seem to be the case.
GG: This is not the case. And the Fed is prepared to lower rates, without haste, as a precaution, in September, so that it will not be lowered in the near future either. The rise of the stock market, after its ups and downs following the unsatisfactory balance sheets of Tesla and Alphabet, gives confidence that this will be the case. It is the signal left by the rotation towards the lagging sectors – small and medium-sized companies – which are also the most vulnerable if a recession surprises us.
Source: Ambito
