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Out of the Box: The Biggest Threat to the Fed is not Trump but the ECB

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Yesterday I said to Reuters:

“The FOMC minutes were no surprise. I did not expect the Fed to cut today but they made a significant move indicating, strongly, that at least one rate cut was coming this year, if not more. I think they needed time to react to the ECB’s new position that rates will be cut in Europe along with a re-start of bond buying or Quantitative Easing. The Fed has not lowered rates since 2008 and I think they are adjusting to the policies of the other central banks with U.S. Treasury yields higher than almost all of the countries in Europe and also Japan. They were also focused on “uncertainties” about both inflation and the economic outlook. The notion of “patience” was no longer part of their thinking. I now think we are in for one, if not two, rate cuts this year as the dot plots have significantly changed to a much more dovish forecast. If the Fed does not lower rates, then the dollar is going to strengthen against the Euro and other major currencies and have a negative impact upon our economy.”

About Bullard’s dissent: “One of the smart people in the room that knows we should be cutting rates now. The ECB’s latest statement and their forthcoming actions put tremendous pressure on the Fed to look out for America as the ECB, the Bank of Japan, and Switzerland are for more aggressive about lowering rates than we are. The central bank of the United States now has to protect American interests.”

In an interview with ABC News, on June 14, Trump said the rate of economic growth in the U.S. would be “at least a point and a half higher” if the Fed had not raised interest rates so much in 2018. Asked about Powell, Trumps said: “He’s my pick — and I disagree with him entirely.” On June 11 President Trump commented “The Fed interest rate way too high, added to ridiculous quantitative tightening! They don’t have a clue!”

Ok, that is his opinion. As I have stated, many times, the Federal Reserve is part of the U.S. government and the President, or any member of Congress, has the right to comment on what they are doing. They are independent, the Chairman serves a four-year term, and the Presidents and Governors have 14-year terms, and they can make what decisions they like. This does not mean that people in government cannot offer their opinions. The Fed was created by an Act of Congress and they are not some off-shore institution. In fact, as the central bank of the United States, their main responsibility, and an even higher calling than their mandates, in my opinion, is to protect the economy and the markets of the United States from erosion, whether economic, or as affected by the other central banks of the world.

Mr. Draghi just weighed in, a few days ago, on what it is that the ECB is likely to do. They are doing it to protect the nations that they represent, no doubt, but to think that it will not affect the United States is lunacy. Mr. Draghi recently said, “In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required. The (European) Treaty requires that our actions are both necessary and proportionate to fulfill our mandate and achieve our objective, which implies that the limits we establish on our tools are specific to the contingencies we face. If the crisis has shown anything, it is that we will use all the flexibility within our mandate to fulfill our mandate — and we will do so again to answer any challenges to price stability in the future.”

After the sovereign debt crisis of 2011, the ECB announced a series of measures to boost inflation and ensure price stability, its core aim. These included rate cuts, purchases of corporate and government bonds, and cheaper loans to banks. After Mr. Draghi’s recent comments, Rick Rieder, Blackrock’s Global Fixed Income Chief, made the comment, “I think Draghi raised the bar. I think Draghi, his comments here are very aggressive. When he says inflation has to be above that level at some time in the future, that doesn’t hit the bar, that says he wants to go beyond it. That raises the bar.”

My expectation now, from the ECB, is another round of Quantitative Easing, more TLAC loans to the European banks, a further drop in European interest rates and maybe even a widening out of the assets that they purchase. President Trump may complain but these actions are very real and will affect the Dollar/Euro relationship and affect the American imports and exports to Europe. In my estimation, the Fed is now under siege to respond and will do so in July, at their next meeting.

Interestingly enough, there is almost no talk, anywhere, about the competition between the central banks but I think that the actions of the ECB, the PBOC, the Bank of Switzerland and the Bank of Japan are having real effects upon the global economy, including America. The United States, is standing out there like a sore thumb, with our interest rates at current levels. The world’s central banks now have a new playbook driven by social programs and government budgets that cannot be afforded using the old one.

I said, back in January, “Interest Rates will be lower for longer and lingering.” Negative yielding bonds have now exceeded the $12 trillion mark and there are even corporate bonds, in Europe, and Japan, with negative yields now. It may not make good economic sense, on the surface, but it makes great economic sense to the nations that are funding their governmental debt. Lower rates, I also point out, will help America with its interest payment on our own debt.

The Great Game has changed, as it always does, and the Fed is lagging, and to the detriment of the United States. “Time to get in the Game,” I say. “Time to get going!”

Mark J. Grant
Chief Global Strategist, Fixed Income
Managing Director
B. Riley FBR Inc.
U.S. 954-468-2366

Information herein is for general use; is not unbiased/impartial; is current at publication date, subject to change; may be from third parties; and may not be accurate or complete. Opinions are the Author’s, not B. Riley FBR, Inc., or their respective affiliates or subsidiaries. This is not a research report or solicitation or recommendation to buy/sell the subject securities. Investment factors are not fully addressed herein. B. Riley FBR Inc. and their affiliates may have a proprietary position in the subject securities.
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