Investment Conclusion
More rate cuts to come; two this year and more next year.
- The Fed reaction function has shifted to labour markets and away from inflation. The Fed’s dot plots show that FOMC expectations are for a blip in short term inflation. The blip will fade as the effect of tariffs are judged to be temporary.
- In two years (it is always to years away) inflation will have converged with the 2% target. Fed rates then fall to the “neutral rate” of 3%. QS research has shown that the US r* is 4% plus. Therefore, monetary policy has been, is and will be stimulatory not restrictive.
- Anticipated achievement of the Fed 2% inflation target is being continually pushed out by two years. That means it does not really exist anymore. That’s a big policy deal.
Otherwise, the Fed’s stance is: •
- Bad for inflation (where the effect of tariffs is not going to be one-off like the Fed believes). •
- Bad for Fed credibility at a time when the war on its independence will be accelerating. •
- Bad for asset bubbles where Chairman Powell dismissed concerns. For investors, it speaks to short US$.