The equity market is strong, unemployment is at 50 year lows, and inflation is completely contained. According to the lagging indicators, there are few reasons that the economy needs a boost. Moreover, the current federal funds rate is 2.5%. That is still low from a historical basis, and it doesn’t give the institution a lot of space to cut rates during a recession. Finally, the long awaited (and ultimately inevitable) recession looks to be a traditional cyclical slowdown rather than an existential threat to the free world, like 2008. Add it all up, and the Fed logically chose not to cut rates last week.
The President is unhappy with the Federal Reserve, saying it has “gone crazy”, accusing the Federal Reserve Board members of acting “like a stubborn child” for not bolstering the market, challenging the bank’s political independence, and threatening Chairman Jerome Powell with demotion or removal. Although the lagging indicators are uniformly positive, the President isn’t hitting the panic button without cause. Recent job growth and new payroll numbers are weak, while trade tensions linger with China, Mexico, Iran, and others. Inventories are higher and new goods and being transported less, year-over-year. Several Wall Street firms are calling for a GDP slowdown from the 1.0% - 2.0% range in the next few quarters. By definition, a slowdown in growth is not a recession; two sustained quarters of losses, actual negative growth, constitute a recession. But the President would prefer to avoid the low margin of error slow growth provide. A pre-emptive, insurance measure from the Fed would be his preference.
On the other hand, the Fed has provided a lot of what the President wants without directly being led by the White House. The weakened Fed only just stopped the advance of rates in March of 2019. Further, the June meeting notes removed their “patient” stance given stagnant environmental conditions, which some analysts interpret as a certain rate cut in July. Investors cheered and we’re hitting all-time highs in the stock market again, despite the warning signals from bond market yields.