The Fed’s rate cut is moving away. But European Central Bank (ECB) will take the baton with a cut next weeka, says Gordon Gekko the veteran of a thousand battles on Wall Street.
Journalist: The FED wants to see better inflation numbers before lowering interest rates. For several months, not one or two. Governor Chris Waller said it. It was repeated Tuesday by Neel Kashkari of the Minneapolis Fed. Do we cross out the expected drop in June, do we cross out July? Can we trust that a first cut will be released in September?
Gordon Gekko: Cross out whatever you want to cross out without hesitation. The Fed needs to see good numbers, not just better ones. And he hasn’t received them for a long time. It is a more than reasonable demand.
Q.: Perhaps this Friday the personal consumption expenditure deflator can bring you some joy with the April measurement. Or not?
GG: April improved through the lens of consumer prices. Without being good, and without measuring up to what Waller and Kashkari demand. There is an expectation in the markets that the deflator will confirm progress. I’m afraid not. I hope I’m wrong.
Q: Is the rate cut postponed to September?
GG: As long as the Fed maintains the current reduction on the point map, nothing is lost, everything moves. When Powell pivoted on December 13, the bet was on March. Then it moved to June. And now the illusion is extended for three more months. According to Chicago futures, September is a toss-up. According to the data, if it does not change, it will fall close. The wait is going to be prolonged. It is not just inflation that appears elusive. The economy and labor market are strong, and activity is picking up. The industry, plain and simple, was resurrected. What would be the trigger? Compared to the view that existed in December, the economy is not threatened by a downturn and inflation worsened in a way the Fed did not expect.
Q: It’s interesting. Kashkari affirms that, in terms of the rate path, no possibility should be excluded. It is the closest thing to a rise that we can hear today. Until recently no hike was on the radar.
GG: Bad readings brought her back to the scene. But there is no intention.
Q: When Powell says that a rate hike is highly unlikely, you believe him.
GG: Yes. I have no doubt that it is so.
Q: But the data could get complicated.
GG: I have doubts about the data, but not with the intention of avoiding going overboard. In terms of raising rates, the Fed definitively retreated into winter quarters. The last move was in July. He does not want to make a Trichet-type error, a characteristic error of the ECB, of giving in to inertia and not knowing how to step aside in time.
Q: Does politics, the election in November, influence? Trump leading the polls and calling for Powell’s head, is it a factor that weighs?
GG: No. If Trump wins the election, Powell is history. It doesn’t matter what the chairman does or doesn’t do. We already saw it when he himself, at Trump’s behest, replaced Janet Yellen.
Q: President Trump, can he do whatever he wants with the Fed?
GG: Neither. He will be able to remove Powell, he will not be able to crown Hasset or any of the candidates he encourages. He will have to negotiate in the Senate. He will be able to choose the replacement, who is a Republican (like Powell; that is, it is not a guarantee of following), but he will have to have credentials that make him drinkable. And Trump won’t want to struggle too much and upset the peace of the markets on a whim. We already saw that movie.
Q.: It will be difficult to lower the rate in September with the election upon us and Biden needing a chokehold. It would seem like a campaign contribution.
GG: If the economy requires it, it will be done. But if you can wait it will be preferable.
Q.: Wall Street walks indomitably through the high peaks. We are left without a rate cut, but it is not needed.
GG: Correct. And there will be lower rates. Only it will start in Europe, which is where it is seriously needed. Q: When? GG: Next Thursday it premieres.
Q: Is it that safe?
GG: All the stars are already aligned. Inflation on the way down. Expectations, too. And the will of the Nordics and Mediterraneans within the ECB. And even the photo of Macron and Scholtz – advocating to strengthen Europe’s sovereignty – is in tune with the decision. The Fed has yet to clear the ground, and the ECB has not. Take the initiative and break the ice on your own (after Switzerland and Sweden).
Q.: It is curious, but when inflation is measured in the US with the same methodology as in the eurozone, no differences are observed.
GG: The difference is not inflation but the position of the economic cycle. Europe contracted in the second half of last year, and is now attempting a recovery. The decline in inflation at the margin, which is rising in the US, allows the ECB to jump into the ring with very opportune timing.
Source: Ambito
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