"While the proverbial Rubicon has been crossed with the Fed's latest rhetoric, it should carefully weigh the consequences of disappointing a financial market addicted to liquidity and losing its most valuable asset - its credibility"
THE latest statement by the Fed all but confirmed an upcoming rate cut in the months ahead. While the dovish U-turn made by Fed chairman Jerome Powell since December has definitely brought relief to the market, the fact is that the data-driven Fed of 2018 has been replaced by a market-driven Fed today. This is because the economic indicators are still relatively strong, but the drumbeat of preventing another market meltdown like the one in the final quarter of 2018 has grown louder.
The narrative goes like this: the Fed raised interest rates four times in 2018, the last one amid heightened trade tensions between the US and China, and this has caused the stock market to fall by more than 20 per cent. Some market indicators, especially the spread between the three-month interest rate and the 10-year Treasury note yield, have also gone negative - indicating that the market is expecting deflation in the future to compensate for lower long-term returns. Since the market represents the collective wisdom of all investors, their prognosis of the state of the economy must not be too far off.
In the past, such a market prediction would have been corroborated by weak economic indicators. This time, however, economic indicators have remained strong.
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ALTERNATIVE VIEWS SEE CUT COMING
