The markets wanted their cake and eat it too. Instead, we received a scotch egg with haggis which nobody seems to have ordered. Not surprisingly, equities initially sold off on the announcement of a 50 basis point cut in US interest rates, before recovering back to where we started. Why fire a bazooka, yet simultaneously signal a slower pace of easing?
For one, we know that central banks are finally worried about growth rather than killing a dead horse. Headline inflation in the US may be running at 2.53%, but the truflation index which allegedly calculates price changes more accurately is at 1.41%. The labour markets are evidently also slowing, earnings are down, and commodities have been signalling recession for months. Check.
Two, we don’t want to get back on the juice too quickly. Every central banker studied what happened in the seventies and the fact is, the world can’t afford 15% interest rates with $100 trillion in government debt. Better then to see how things develop before we anoint Michael Portillo as the next prime minister. Check.
Three, it’s an election year. Whereas the challengers need things to be bad, so they can save America, the incumbents need things to go well because you know, it’s the economy stupid. The Fed undoubtedly maintained its neutrality by going half-pregnant. However, it still makes you wonder if a 25 basis point cut would not have better served all objectives. Uncheck.
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