The outlook for the U.S. fed funds rate has made a major shift in the last month alone. A month ago, investors were expecting the Federal Reserve to maintain or raise interest rates this year. Now, investors are betting on an interest rate cut in 2019, and White House advisor Larry Kudlow said Friday that rate cut needs to happen “immediately.”
Axios first reported Kudlow said he wants the Fed to “immediately” cut interest rates by 0.5 percent and that he would “love to see” interest rates at or below 2 percent. The current fed funds target rate is 2.25 percent to 2.50 percent.
"I am echoing the president's view. He has not been bashful about that view. He would also like the Fed to cease shrinking its balance sheet, and I concur with that view," Kudlow told CNBC on Friday afternoon.
"There's no emergency, it's just a point of view," he said. "Frankly, I think they went too far [with tightening]."
He said Europe and other global economies are virtually in a recession, and he'd like to see interest rates come down at some point. Kudlow said his initial quote of "immediately" may be a misquote.
"We don't want to threaten this great recovery," Kudlow said.
Why It's Important
Just one month ago, the bond market was pricing in a 91.5-percent chance interest rates would remain the same through the end of the year and just a 6 percent chance of a rate cut, according to CME Group. However, earlier this month the Federal Reserve cut its 2019 GDP growth forecast from 2.3 percent to 2.1 percent and said there will be no rate hikes this year.
Today, the bond market is pricing in a 66.1-percent chance of at least one rate cut this year.
Investors will be watching to see if the FOMC’s language regarding the economy changes at all at its next meeting starting on April 30. Federal Reserve vice chair Randal Quarles told economists in a speech on Friday the economy is solid and more rate hikes “may be necessary at some point.”
Investors didn’t react to Kudlow’s calls for a rate cut on Friday. The SPDR S&P 500 ETF Trust (NYSE: SPY) was higher by 0.5 percent. Yields on 10-year Treasuries were up 0.016 percent to 2.405 percent.
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