There is absolutely no need for a rate cut.
Consumer confidence is high, unemployment is low and Treasuries’ yield is at 2.1%, while credit to the economy and corporate financing are not suffering.
The weakness in core consumer prices in May, which increased by only 0.1 %, was entirely due to lower prices of used vehicles, and core CPI inflation remains within the Fed target, falling from 2.4% in mid-2018 to 2.0% in May. Headline CPI inflation fell to 1.8% in May due to lower energy prices, so there is absolutely no logic in a rate cut. With unemployment at 3.6%and annualized GDP growth expected to remain above 2.3%, demands for a rate cut are only an excuse to keep financial asset prices higher at any cost
There are some elements that point to a slight weakness in the economy but no need for a rate cut.
A rate cut would only fuel the debt bubble further, and leave the Fed with fewer tools to address a slowdown. When so-called “High Yield” means 365 bps for junk bonds of companies close to bankruptcy and Treasuries yield 2.1% there is no reason at all to cut rates. Rather the opposite.
The debt bubble is dangerously inflated and lower rates would only make it worse. The ratio of US corporate debt to GDP, as well as the high-risk loan figure and securitized debt, have risen to pre-crisis levels. US deficit is rising because spending soars and the government finds debt cheap and abundant. Government spending rose to $440 billion in May 2019, up 21% from May of 2018. Yes, up 21% from May of 2018. All this despite record revenues. Receipts increased to $232 billion, up 7% from the same month last year.
A rate cut would only create a larger problem in the future. If the already dangerous corporate and sovereign debt bubble grow significantly more, no monetary policy will prevent a debt crisis.
A version of this article first appeared here.
Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of Economics, Funds Society Forum in Miami, World Economic Forum, Forecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; “The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBC, World Economic Forum, Epoch Times, Mises Institute, Hedgeye, Zero Hedge, Focus Economics, Seeking Alpha, El Español, The Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).