Could it be that Donald Trump was right?
Market watchers now expect the Fed’s erstwhile pause in rate rises to morph into a full-blown U-turn, and soon too. President Trump, of course, has been lambasting the Fed for being too hawkish on rates for some time now, against accepted protocol and even though the current Fed chief Jerome Powell is his own appointee.
Powell himself has carefully crafted a narrative of independence which has been underscored by well-publicised plans to boost rates this year and next. Those plans are now no more, however, and it wouldn’t be too surprising in the coming days to see Mr Trump claiming both victory and credit.
After all, he’s done it in the past. Earlier in the year he noted the Fed’s new-found dovishness on further rate rises and claimed that it was not a moment too soon. Now though, the market is actually expecting the Fed to cut rates again, possibly twice this year, and Mr Trump will get his wish.
It’s not a vindication though.
Far from it. In fact, the Fed’s dovishness on rates comes as a direct response to economic data that shows that a slow-down is coming. Partly, that’s cyclical, and analysts have all along been expecting some weakening from the phenomenal growth numbers the US has been returning for the past couple of years.
But it’s also partly of Mr Trump’s own making. There’s a general feeling among analysts that the storms ahead could be weathered, as long as nothing exacerbates their violence. Like, for example, a trade war between the world’s number one and number two economies.
And, while it’s true that Mr Trump has a large measure of support inside the US for his stance in China, it’s also true that as the US economy slows, tariffs and economic disruption may well turn a modest correction into a sharp one.
It’s this new reality that the Fed is now facing up to, and which has precipitated two senior members of the Open Markets Committee to opine that a rate cut is now a very real possibility. Some market watchers are placing the chance of a rate cut within the next month as high as 70%, with a further cut due later in the year.
It all represents a sharp change of tack from the talk of rate rises that was common currency towards the end of last year. And on the market it’s had some fairly predictable consequences.
Gold, weighed down in recent months by the Fed’s hawkish stance in rates, has suddenly burst up through the US$1,300 mark again, putting on more than US$50 per ounce in just over a weak. Correspondingly the dollar has weakened, although most other global currencies, not least the pound, are weak too, so we are once more in a race to the bottom.
Silver has seen renewed interest too, as savvy buyers leapt in when the gold-silver ratio widened, and bid up the price.
Copper though, continued its decline, even as LME stocks rose. Copper is often regarded as the bellwether metal for the global economy and the Fed can see just as well as everybody else that it’s fallen by more than 10% over the past six months.
Nor are the Europeans able to pick the slack. Aside from Brexit, the Eurozone is struggling to build a solid foundation under any economic growth it manages to muster. The latest data from Germany was described by ING as “horrible”, the Italians look in line for billions of euros of fines after breaching deficit limits, and the European parliament looks increasingly illegitimate.
With China also on the back foot, this is a global economic environment which is crying out for easy money, the panacea of the post-gold standard era. How much longer central banks can keep on giving is an open question.