American Consumers Prop Up the Economy. Wall Street Clamors for Multiple Rate Cuts. Fed Blows Off Wall Street

The economy is in a “very good place,” says Trump’s man at the Fed. And the Fed’s favorite inflation measure ticks up.

The Fed’s message has been that it may consider cutting rates if the economy deteriorates, or if inflation falls further, but the economy is currently in a “very good place,” it says. And consumer spending, 70% of the economy, is growing nicely instead of deteriorating, and the Fed’s favorite measure of inflation has just ticked up. But don’t tell Wall Street.

Consumer spending on goods and services in April, as tracked by the Personal Consumption Expenditures data released this morning by the Bureau of Economic Analysis, rose 4.3% compared to April last year, to a seasonally adjusted annual rate of $14.39 trillion. This represents about 70% of the $20.5 trillion US economy. And that’s why everyone keeps their eyes riveted on consumers, whose sole job it is to consume, or else. This increase was right in the range since the Great Recession, not the red-hottest growth rate in the history of mankind, but decent:

Of this $14.39 trillion that consumers spent, $9.96 trillion was spent on services, which is why the service sector is so crucial to the economy. $4.43 trillion was spent on goods ($1.47 trillion on durable goods, and $2.96 trillion on non-durable goods). In addition, consumers forked over $368 billion in interest. All these are “seasonally adjusted annual rates” – meaning if consumers go at April’s pace for the whole year, these would be the totals for the year.

Adjusted for inflation, Real Personal Consumption Expenditures on goods and services rose 2.7% from April last year. This too was right in the range since the Great Recession:

So how did consumers get this much moolah?

Personal Income rose 3.9% from a year ago to a record $18.1 trillion seasonally adjusted annual rate in April. Personal income includes wages; supplements to wages such as employer contributions to pension funds and insurance; rental income; farm income; interest and dividend income; government social benefits such as social security, unemployment insurance, or VA benefits; and the like. More details in a moment.

Adjusted for inflation, Real personal income rose 2.4% from April last year, right in line with the past couple of years:

Among the factors that contribute to growth in personal income and spending are population growth (around 0.8% a year) to nearly 329 million, as of this report, job growth (up 1.8% over the past 12 months), and growth in various forms of income.

Income from “wages and salaries” in this report rose 3.6% year-over-year to a record seasonally adjusted annual rate of $9.07 trillion. As high as this is, it accounts for only half of total personal income of $18.1 trillion.

Among the other forms of personal income: Interest income rose 1.6% year-over-year to $1.6 trillion, and dividend income rose 4.0% to $1.17 trillion.

The table below shows the categories of personal income from the BEA’s report for the first four months of 2019. All amounts in billion dollars, at seasonally adjusted annual rates:

Disposable income is what’s left over after the government gets through with personal income. So this is personal income minus personal taxes and other contributions for government social insurance, such as contributions to Social Security, Medicare, unemployment insurance, and the like. Disposable income rose 3.8% from April last year, to a record $15.96 trillion seasonally adjusted annual rate.

Adjusted for inflation, real disposable income rose 2.2%, also in the middle of the range:

Given this pile of disposable income minus all the outlays, consumers saved $990 billion in April, at a seasonally adjusted annual rate. This produces a savings rate of 6.2% of disposable income.

Consumers are making more money, and they’re spending most of it to prop up the economy, and they’re saving some of it too. In other words, American consumers as a whole are doing their job.

In the same report this morning, the Commerce Department said that the Fed’s favorite inflation measure, the PCE price index without food and energy, or “core PCE,” rose 1.6% for the 12-month period, up from an increase of 1.5% in March. While this remains below the Fed’s target of 2.0%, it’s going in the right direction for the Fed (and the wrong direction for consumers).

The “Trimmed Mean PCE Inflation Rate” which Fed Chair Jerome Powell mentioned to show that the dip in inflation was “transitory,” and which eliminates the outliers, rose to 2.03%, on par with the peaks in July 2018, January 2017, and just below the recent high in January 2012 (2.10%).

And consumers are high with excitement. The University of Michigan said this morning that its consumer sentiment index for May rose to 100, from 97.2 in April. This level of 100 is near the very top of the range over the past two decades. You have to go back to the years of the Dotcom Bubble to find consumers consistently more excited.

Consumer confidence can be shaken, and protracted trade-war rhetoric, a 50% stock market crash, a big bout of inflation that moves things out of reach, or other events could shake that consumer confidence. But in the past, we have seen that even with shaken confidence, consumers still scurry around, spending what they make, or more than they make, no problem, because American consumers are a hardy folk.

Meanwhile (A), Wall Street is going nuts with rate-cut speculations, trying to outdo each other in order to throw fuel into the rate-cut flames. Barclays just came out predicting three rate cuts this year, totaling 75 basis points, starting in September… desperately talking its book.

Meanwhile (B), even the biggest Fed “doves” are coming out to say, wait a minute… the economy is in a “very good place,” and it would have to deteriorate and inflation would have to drop before it’s time to consider cutting rates.

Minneapolis Fed President Neel Kashkari was the latest. He chimed in today on Bloomberg TV, saying that it’s too early to cut rates. Low inflation and the escalating trade war are a concern, he said. “Either of those could be cause for changing the path of monetary policy,” he said. But he wasn’t “quite there yet,” he said. “I take a lot of comfort from the fact that the job market continues to be strong.”

Yesterday it was Fed Vice Chair Richard Clarida – Trump’s man at the Fed – who said that the economy is in a “very good place,” and the economic data would have to reveal a significant risk of a sharper slowdown than the slowdown the Fed already expects before the Fed would consider cutting rates.

So interesting to see the growing disconnect between even the “doves” on the Fed who insist that now it not the time to cut rates, and Wall Street, which is clamoring for three rate cuts this year. Meanwhile, American consumers, who are in charge of propping up the economy, rather than just talking about it, are doing what they do best, working hard and spending their hard-earned money.

One of them is wrong. Watch out for it to snap in an ugly manner. Read…  OK, I Get it, Markets Have Gone Nuts: Junk-Bonds Are in Party Mood, Treasuries Clamor for Doom & Rate Cuts

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  58 comments for “American Consumers Prop Up the Economy. Wall Street Clamors for Multiple Rate Cuts. Fed Blows Off Wall Street

  1. andy says:

    Well, the entire yield curve is now inverted with exception of 30-year treasury which is only 0.25% higher than 1 month T-bill.
    Some people managed to open 4% 5-year CDs when they existed for couple of weeks.

  2. akiddy111 says:

    The Fed knows that everything is fine. It says so.

    It’s just that Wall Street never got the memo. Thanks. Now I know… and please ignore the 10 year at 2.14%. Wall Street made a big mistake.

    Now please excuse me while i go and read what the FOMC says in it’s minutes to find out what is really going on.

    • Wolf Richter says:

      akiddy111,

      Wall Street constantly makes “big mistakes,” for example, valuing Tesla at $74 billion last year, and now it has plunged to $32 billion. Wall Street refused to see the Financial Crisis, and it was all “buy, buy, buy,” until the whole thing crashed. Wall Street works on what I have termed “consensual hallucination,” which works until it doesn’t.

      • polecat says:

        That’s cuz WallStreet is always doin the brown acid ….

      • GP says:

        Nice set of data. Strong case that current snapshot of economy looks excellent.

        Prediction of future of economy is always hard, especially when Fed plays Calvinball. Predicting what Fed might do adds another layer of unwanted mystery.

        When Wall street gets things wrong, it eats up the losses. When Fed gets it wrong, everyone pays for that.

    • Wolf Richter says:

      akiddy111,

      Oh, and in terms of a “big mistake”: for example, in 2016 through July, Wall Street pushed the 10-year yield to a historic low of 1.37%, then realized how big a mistake that was, and within six months, the 10-year yield nearly doubled to correct this big mistake.

    • NARmageddon says:

      Agree. in particular: Every time the phrase “a correction” is used, it means Wall St made a mistake. And everyone gets to to pay the price for that mistake, while often Wall St gets the profit. Nice.

  3. RepubAnon says:

    Wall Street knows that Trump wants rate cuts to goose the economy going into the 2020 election – and that Trump will fire whoever he has to to get those cuts.

    It’ll damage the economy, but Trump doesn’t care about that – he’ll blame Hillary’s e-mails.

    • Ppp says:

      The reason I doubt rate cuts is they would make no difference and would scare the horses. It’s over–why pretend?

  4. IdahoPotato says:

    From the latest Deloitte research:

    “The net worth of Americans ages 18 to 35 is $8000. It has dropped by 34 percent since 1996.

    Education expenses have climbed 65 percent in the past decade. Food costs have jumped 26 percent, health care is up 21 percent, housing jumped 16 percent and transportation rose 11 percent.

    Today’s 20- and 30-somethings spend about 17 percent of their incomes on education, health care and rent, compared with 12 percent a decade ago, the study found.

    Discretionary spending, which includes dining out, alcohol and furniture, has remained largely flat, at about 11 percent of total income.

    Only 20 percent of consumers were meaningfully better off in 2017 than they were in 2007, with precious little income left to spend on discretionary retail.”

    ________________________________________

    The avocado toast set and fancy latte set comprises that 20%. The rest are screwed. Millennials are a quarter of the U.S. population and 40% of the working age population.

    If consumers and spending and have high positive sentiment, they are either
    a) taking on a lot of debt or
    b) the spending is skewed towards the top 20%.

    • Wolf Richter says:

      Spending is always skewed to where the money is. By definition. But the economy doesn’t care who spends, as long as someone spends.

      • IdahoPotato says:

        Then “consumer sentiment” is a slightly misleading term to indicate the overall health of the economy as determined by consumer behaviour, methinks.

        Maybe they should call it “deep pocket sentiment” or something.

      • Ppp says:

        Unless of course, the economy is a myth.

      • Cynic says:

        And this is what explains the seeming paradoxes of ‘jobless/underemployed growth’, ‘growth in collapse’, etc, which are defining our age.

        We have headline figures which are – as this article demonstrates – just fine, while real mass prosperity declines steadily with all the consequent social erosion and tensions.

        Look across the Atlantic to Spain, for instance, and the picture is one of decent headline growth since the 2008 shock, but wage stagnation and still very high average unemployment rates and the worst regions mired in hopelessness.

        A wonderful time to be a business owner though, with low interest rates and an easily-exploitable, simply desperate, pool of labour.

        • Pinto says:

          “A wonderful time to be a business owner though” in Spain!!!

          Nuts !!!

          Only big business which have access to Corporate sector purchase programme (CSPP) can more or less survive the high taxation, and over regulated EUssr.

          Only a Nut will open a SME small business Enterprise in EUssr. You get a 55% shareholder named government from the get go. That steal from you and makes so many commandments that puts your business in arms way.

          Going Galt is the only solution outside big corporations.
          And by going Galt I mean USA stock market. Forget dax forget cac , all rigged.

          Owning a SME in EU is risquier than trading vix, sxvy et all!

          Trading USA stock you can get out whenever you want (you may loose money) but you can!

          Try to get out of a SME in EUssr and tell me how that works out for you!!!

      • Rinaldo says:

        “the economy doesn’t care who spends”
        Well, me thinks it does.
        We will find out soon, when the the Gov. will have to replace the lack of spending by the working population and the budget deficit will balloon to 2 trillion or 3 trillion.
        BTW I find it interesting Wolf, that you use the official inflation numbers to determine disposable income.
        An inflation with out food and energy is irrelevant for the average consumer imo and the CPI is understating real inflation by a wide margin.

      • QQQBall says:

        Health care costs by 21% in 10 years? Here pull my finger~! And food is up way more than 26% unless you eat salted snacks and 20-cent a package ramen. And, the real costs f food inflation will be poorer health. A knock-on from medical costs is that medicare will BK faster.

        The corps get tax breaks and the asset-owning class can borrow against asset base tax free and build their asset base quicker. The working class pays more in taxes and fees, pays more to live and is working harder for a level or declining inflaton-adjusted income.

        Something will break.

        • Rinaldo says:

          I live in Africa. Shoooting striking mine workers doesnt won hearts. Paying thousands og $ for Rhino horns and ivory neither, but they are definitely winning the minds og corrupt politicians, all ocer the planet.

    • IdahoPotato says:

      “If consumers ARE spending and have high positive sentiment”

  5. akiddy111 says:

    Maybe Wall Street is seeing a China slowdown, Semis, construction spending numbers, Autos, Corporate Debt, deserted shopping Malls ,etc.

    You were correct yesterday. There is a conundrum in that junk bonds are shrugging off the sell-off in the 10 year (it is down 50bp for the month of may) as well as stubborn weakness in emerging market equities, small caps, and equities in general.

    European bank equities are selling at levels similar to the last week in 2018. The entire monster YTD rally has been erased.

    Somebody needs to tell the junk bond market what is going on. But do not disturb the Fed. It’s enjoying a pleasant nap.

    • nicko2 says:

      India is also slowing, they are no longer the fasted growing economy… Brazil, also slowing…. Mexico; slowing… Turkey moving backwards, Pakistan facing mounting inflation and currency crisis. The only economies not slowing are in Africa.

      • alex in san jose AKA digital Detroit says:

        And guess who’s (even if indirectly) bombing civilians in Africa? The US. Who’s building hospitals and digging wells and winning hearts and minds there? China.

        • Emil says:

          Yes, the chinese are winning hearts by making big loans for the African countries that spend it on frivial things. As soon as the money runs out, as usual, China will be the new overlord in Africa. All in the disguise of “winning hearts and minds”. Perfect strategic move by the chinese to allocate the mineral rich African nations from their resources.

        • Tonymike says:

          @ Emil
          As if the west hasn’t been raping Africa (India, SEA) for everything not nailed down for 400 years. The only roads and railways built in Africa was to get the minerals (and other wealth) out and the soldiers in. Now the control vector is in drones and importing ISIS and Boko Haram to scare people.
          Now China is the bad guy. Yeah right.

        • Emil says:

          @Tonymike

          Never said China is the bad guy in this. I think its not that black and white, that someone is a bad guy and good guy. Its human nature to take advantage of the weak, so nothing unnatural happening in Africa.
          Africa was a pretty nice place from what i have seen from videos and pictures when the West extracted resources from these mineral rich places. Its not like the West has not given back anything to them.
          I could assume that a large portion of the population would starve to death if it was not for the food aides. You seem to have some sort of personal resentment for westerners.

      • Rinaldo says:

        @nicko2

        “The only economies not slowing are in Africa.”

        Really, and what country is that?
        May be we could spread your info via Social Media to all those migrants which are going to turn Europe into the same …hole they try to escape.
        South Africa, probably the biggest African economy, has never recovered from 2008 and is now slowing down substantially. Unemployment at about 30%. In the next crisis many African countries will default. It is already so bad that I am thinking of moving. The big question is where.

  6. IdahoPotato says:

    Bookmark this.

    “… as of now, business debt does not present the kind of elevated risks to the stability of the financial system that would lead to broad harm to households and businesses should conditions deteriorate. ”

    – Jerome Powell. May 20, 2019

    ————————————————–

    “Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the sub-prime sector on the broader housing market will likely be limited.” – Ben Bernanke, May 2007

    “At this juncture, however, the impact on the broader economy and financial markets of the problems in the sub-prime market seems likely to be contained.” – Ben Bernanke, March 2008

    • sierra7 says:

      Idaho Potato:
      Add….”….the economy is basically sound…..Prosperity is just around the corner!” Herbert Hoover Great Depression
      (And, we know how that turned out!)
      A “…great economy” is in the eyes and experiences of the beholder participant.”

  7. NARmageddon says:

    “Trimmed Mean PCE Inflation Rate”. Huh, is this just a measure of spending inflation or is it a measure of price inflation? I mean, a consumer can certainly spend more, but it is not a a given that they paid more or less per unit of good from such a number. Most likely they got nothing in return (or negative return) for spending more, due to price inflation. Spending on housing would be a prime example. Cars, too.

  8. Rowen says:

    Based on the EOB’s, my father “spent” more in the past 12 months for health care that I have my entire life for consumer goods. Probably 800K worth of services.

  9. Double D says:

    The FED is notorious for their inaccurate economic prognostications. I wouldn’t believe anything that comes out of the government. There is no real growth in any economy, the U.S. being the best of the worst in the developed world. On top of it we have an administration making very dangerous & damaging decisions directly affecting all Americans.

    Economic fundamentals will always matter eventually & they’re starting to matter now. The bond markets & commodities are telling the story. Oil has been pounded down over $11/barrel in 10 trading days. The SPX just had it’s worst month of May since 2010. The real story is not of a robust, strong (consumer confident) economy.

    • Wolf Richter says:

      Double D,

      “The bond markets & commodities are telling the story.”

      So let me dissect that a little.

      The corporate bond market, particularly the riskiest end of it, is seeing nothing but boom.
      https://wolfstreet.com/2019/05/30/junk-bonds-are-in-party-mood-treasuries-clamor-for-doom-rate-cuts/

      Oil prices are down due massive overproduction in the US shale space and storage levels that are approaching oil-bust records.

      Some US ag commodities are soaring, such as corn futures, soybean futures, and wheat futures
      https://www.cmegroup.com/trading/agricultural/

      Iron ore has reached a 5-year high:
      https://markets.businessinsider.com/commodities/iron-ore-price

      Each commodity has its own dynamic and its own reasons for moving — while US consumers just keep plugging along.

      • Insta says:

        It doesn’t surprise me that corn and soybeans are soaring. Farmers in the Midwest are way behind in planting this year because of almost constant rain. In central Illinois the news said the other night that it rained 59 days in the three months of March, April, and May. If the crops aren’t planted by June 10th, many can collect their crop insurance and just not plant this year.

        This could affect food prices this fall and next year. To also help things along, the Illinois house voted last week to double the state gas tax from 19 to 38 cents per gallon…. the infrastructure is needed, but the timing is impeccable. It is not a done deal until the Senate votes though.

  10. They used to separate out ‘discretionary’ but that was too inconvenient I suppose. Health insurance became mandatory. For consumers gasoline is at the high end of the range, while crude prices are falling, and the lag there is noticeable, while the loss of jobs and investment capital in energy businesses is a leading indicator. The Refi rate is low while banks are tightening up lending restrictions. I always wondered why is it a good thing when the consumer has to spend more of their money but gets no more for their spending?

    • alex in san jose AKA digital Detroit says:

      Ambrose Bierce – Yeah, mandatory, right. I turned in some paperwork about 2 weeks late (it takes mail an extra week or so to get to me) and now I’m kicked off of Medi-Cal and have to re-apply. More Xerox copies, envelopes and stamps. When I went to the ER last year, I swear I sent out 6 copies of my taxes to various entities.

      Great medical care for the top 10%, less and less availability at all for the rest of us.

  11. Marc D. says:

    That’s great the Fed is doing the right thing, rather than listening to Wall Street. Economic growth is good, unemployment is at 50-year lows. No need to lower rates.

  12. Timothy J McLean says:

    There are an amazing amount of conflicting data to digest on a daily basis. I agree with Marc D that the economy is good and there’s no reason to raise rates. I think Trump is trying to push the Fed to lower rates by putting these new tariffs on Mexican goods.
    I hope the Fed has the guts to stay the course. Following the ECB and BOJ down the path of NIR policy is a road to destroying the US banking system.

  13. Petunia says:

    For the last decade millennials have been largely unemployed or underemployed. As they get a better footing in the job market, the burden of supporting them is lifted off their parents/households. Because many are still at home, this frees up money for them and their parents. These kids are paying off student debt, saving, and spending.

  14. WES says:

    Seems to me that there is a disconnect between Wall Street and Main Street.

    We know Wall Street is always delusional.

    The current President has been trying to shift the balance of economic power from Wall Street back towards Main Street. Maybe it is working. Maybe that is what we are seeing.

    Economist are always the last to figure anything out!

    • Paulo says:

      Wes said: “The current President has been trying to shift the balance of economic power from Wall Street back towards Main Street. Maybe it is working. Maybe that is what we are seeing.”

      Paul Says: How do you figure this? Tax breaks for the wealthy and corps promote stock buybacks and stock price increases. Meanwhile, when the Dow rises it is immediately touted as a good thing and indicative of a strong economy. The working guy, in general, is shafted and spending at a delusional rate.

      IMHO, this is a time to have cash and be liquid. What % of this attitude is certainly going to vary from person to person, but in tough times you can’t eat paper and you can’t do a deal without cash if lending dries up.

      • WES says:

        Paulo: My observation is there seems to be plenty of low paying jobs at the moment.

        High paying jobs not so much.

        It just seems to me people are happier when they are working than when they are not working.

        Just human nature.

      • Cynic says:

        Quite right Paulo.

        I value my woodshed – which is as big as the ground floor of my house and full to the roof with seasoned wood – much more than my stocks, etc. It can’t dissolve away….

        And the house is freehold and fully paid-for, with raised beds coming along nicely and new fruit trees doing well.

        And guess what, cutting and stacking that wood keeps me healthy and happy.

        I view the ‘consumer excitement’ stats with wry amusement, and something bordering on pity for anyone who can be ‘excited’ at what is unfolding.

        • alex in san jose AKA digital Detroit says:

          Cynic – I am the very definition of a proletarian, having no means of production and only my labor to sell.

          30 years ago I was making 2X the min. wage with tons of benefits and a 401k, now I make about min. wage with no benefits as a 1099, live in a warehouse, and only work 20 hours a week. There is no more need for electronics technicians.

          I will never own land, not being of the land-owning class. Class is all-important in this new economy. At best I can become the more skilled type of workman. I’m pretty much done with being a “busker”, or street musician. I am considering going into sign-painting after all.

      • kam says:

        To Paulo:
        Trump is an acquired taste.
        From Wolf’s article:
        “Given this pile of disposable income minus all the outlays, consumers saved $990 billion in April, at a seasonally adjusted annual rate. This produces a savings rate of 6.2% of disposable income.

        Consumers are making more money, and they’re spending most of it to prop up the economy, and they’re saving some of it too. In other words, American consumers as a whole are doing their job.”

        “American consumers” are a contrived Economic construct. They are real people with real lives and real families.
        Create the conditions for on-the-ground investment and employment. Create the conditions for private sector entrepreneurs to start and grow their businesses. Create jobs and competition for jobs. Then, and only then, can you have the engine of economic growth that has been smothered under Big Government and Central Banking for the past 10 to 30 years.
        Annualized savings of $1 Trillion (6%). Unheard of. Nearly offsets the deficit, so in the case of the Trump economy, deficit spending is generating a return. We are not just inflating assets and calling it a real economy.

    • Prairies says:

      Wall street to Main street, in the past 6 months automotive manufacturers have boasted about great earnings(wall street plus) while closing manufacturing facilities in North America(main street loss).

      The same thing has been happening in the tech industry over the winter, record level earnings calls with hundreds of people laid off.

      The farmers also needed a tax subsidy(bail out) because of a tariff war.

      The list can go on, but the summary will always be that it gives main street an apple but it gives corporations an orchard.

  15. Bobber says:

    Inflation at 2% may agree with the Fed’s goal, but it is a bad result for the long-term health of our economy.

    Recurring 2% inflation can only be caused by debt growth in excess of GDP. It doesn’t take genius to figure out where that leads.

    The Fed’s stated goal is to create a big bubble, then go hide in a closet.

  16. sharonsj says:

    I don’t believe any of this. 2/3 of money spent is on services. I bet services also includes utilities as well as anything you need done that you can’t do yourself. The cost of services just keeps getting out of hand. Then I see the rest is apparently spent on food, drink, and appliances and gizmos. According to places like ShadowStats, real inflation is around 6% to 10%, which outstrips any so-called raise in the income of average people. Finally, everyone I know is broke, so I assume the numbers are completely skewed by the upper 10% or maybe just the upper 1%.

  17. Ididsa says:

    Tanks for the informative article

    “Wolf Richter
    May 31, 2019 at 3:52 pm
    akiddy111,

    Oh, and in terms of a “big mistake”: for example, in 2016 through July, Wall Street pushed the 10-year yield to a historic low of 1.37%, then realized how big a mistake that was, and within six months, the 10-year yield nearly doubled to correct this big mistake.”

    Well said.

    The Long term treasuries are overbought. It’s not only Wall Street that’s distorting the yield curve. The administration is applying a ridiculous amount of pressure on the trade policies and this is creating havoc in the bond market. The long term bonds are well into overbought territory and it’s getting quite dangerous out there. On TLT a 100 bps swing translates to 17% variance in the market value. It’s completely insane.

    And rate volatility induces equity volatility and equity volatility induces rate volatility. It a horrendous feedback loop.

  18. Willy2 says:

    – Nope. The FED WILL cut rates because the 3 month T-bill rate has dropped as well in the last weeks. The only question is WHEN.
    – I assume the FED will delay that rate cut as long as possible becaus ethey don’t want to be seen to be susceptible to pressure from the White House.

  19. Green Oyster says:

    It’s well established that it takes about 12 months for a rate cut to percolate through to the underlying economy. This implies that the economy is far hotter than the data suggest if the FED is hesitating to cut NOW.

    But the cyinic in me thinks that because of the above, and because it has been proven that the FED is the keeper of Wall Street, we will see an emergency cut of 0.75% or larger within the next three months. The trade war damage will have been done though and it will be too late to stop the decline. The Fed ‘reacts to past data’, it does not extrapolate from existing data.

    I’ll bet anyone a beer on my prediction.

  20. historicus says:

    Why isn’t the Treasury doing all its money raising in the long end?
    And why isn’t the Fed trimming their balance sheet? If you can’t trim the extra 3 Trillion with record employment, a near record stock market, and an inverted yield curve, when can you??

    • Money at the short end is made available at the REPO window, for banks and institutions, who then buy stocks and securities, and rollover the balance every thirty days. It’s a far less effective tool than QE but it works pretty well in the part of the cycle after a great deal of liquidity has been introduced, and you want to keep that money moving. The important part for the Fed is to stay behind the curve and to telegraph it’s every move. The terms of REPO are short, by rolling it over again and again it resembles a long term bond at a short term rate. IOER is really Reverse Repo, a tool of financial repression.In RRPO the window opens and a pair of hands grabs you by the lapel. The Fed is still taking the training wheels off the banking industry. The banks are zombie GSE toxic security waste dumps (and the Fed has a plan for allowing them to do QE). The purpose of the policy is to buttress them for the next bailout will be the shadow banking industry. Deregulate, allow shadow banks to pass shady assets on to solid banks, like 2007, and provide guarantees to these banks. Buffett owns both by the way, which defines their schizoid investment thesis. There are some problems in the Fed plan, the Congress may monetize their excess reserves, should they pile up. And with the current political dysfunction anything is on the table and middle class Americans would not disapprove of having the Fed work for them for a change.

  21. Ron says:

    The PR blasts from Wall St to lower interest rates has reached hyper status
    makes me wonder what is happening behind the curtains.

  22. Gershon says:

    Ten years of “emergency measures” that have benefited only the Fed’s oligarch controllers and corporate grifters, while the middle and working classes fall further behind. Now Powell is going to panic and drop rates as the Fed’s Ponzi markets and asset bubbles start to crater.

    Remember when we had honest markets, sound money, and non-complicit policymakers, regulators, and enforcers? Me neither.

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