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Fed will likely cut rates, converging with Trump's criticism: analyst

The Federal Reserve makes its penultimate 2019 decision on interest rates next week, and Fed Funds futures are pricing in a 93.5% chance of another 25 basis point cut, according to the CME’s FedWatch Tool. That would put the benchmark interest rate at a range of 1.5% to 1.75% after the decision is announced next Thursday.

President Donald Trump weighed in on the central bank yet again today, tweeting his frequent refrain on the Fed, that is it needs to provide more monetary accommodation.

The Fed appears to be following Trump’s path, even if Chairman Jay Powell and company are independent and aren’t directly taking Trump’s advice.

“So far, the Fed’s thinking in terms of its outlook, in terms of how it’s thinking, is converging with some of the criticisms from the White House,” said Ed Al-Hussainy, senior interest rate and currency analyst for Columbia Threadneedle Investments, although he said it’s impossible to know conclusively if Trump is directly affecting central bank decision-making. “The question is at what point does that bleed into the Fed's thinking? And there we don't have a lot of transparency. We will know in a number of years when those transcripts come out.”

Al-Hussainy thinks the Fed will continue to be in easing mode well into 2020.

“The real question now is how much forward guidance do they give us for the rest of the year and well into 2020. What’s the criteria for further cuts, and at what point will they stop and essentially call the end to an insurance cycle. From my perspective, it’s premature to do that. If you look at the intervening data, it’s deteriorated. If you look at the outlook for 2020, it hasn’t necessarily improved. The onus on the Fed to provide accommodation is still very much with us.”

As for downside risks associated with long rate-cutting cycles, he said there’s no sign of asset bubbles yet.

“It's an evergreen concern that monetary policy translates into asset bubbles,” he said. “[But] the distance between easy monetary policy and asset bubbles is significant. A lot of things have to happen in between, and a lot of them have to do with market psychology. And conversely, tight monetary policy is not very good at popping asset bubbles, and we saw that in the mid-2000s with the housing market. So, I think the Fed is going to continue to marginalize those concerns, at least in its current framework.”

Julie Hyman is the co-anchor of On the Move on Yahoo Finance.

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