President Trump continued his twitter tirade against the Federal Reserve Monday tweeting, “The Fed raised and tightened far too much and too fast. In other words, they missed it big.”
“I think he’s making a very valid point,” Invesco Vice Chairman of Investments Krishna Memani told Yahoo Finances On the Move.
“Even if you disagree with Donald Trump’s tactics, the Fed itself is sort of admitting the fact that last year that it tightened too much and needs to unwind some of that tightening,” Memani added.
Members of the Federal Reserve’s FOMC gather next week for a two-day meeting and Wall Street is expecting a cut in interest rates of at least 25 basis points. The Federal funds rate is currently in a target range of 2.25% to 2.5%.
But last Thursday New York Fed President John Williams delivered comments some analysts interpreted as a signal the Fed might cut 50 basis points when he said it, “pays to act quickly to lower rates at the first sign of economic distress.”
A spokesman for the Federal Reserve Bank of New York clarified Williams comments saying it was not about potential policy actions at the upcoming Fed meeting.
The bottom line according to Memani is everybody is trying to read tea leaves. “We think the underlying strength or revival of the economy, 50 (basis points) is not required at the moment.”
Rick Rieder, the global CIO of fixed income at BlackRock told Yahoo Finance last week, “When you’re cutting rates, you actually do want to shock the system,” he said. “If the Fed wants to say we’re going to promote a global expansion or continue the expansion in the U.S., then arguably go 50 and then say, you know what, we’ve done what we need to do.”
Memani thinks it’s more likely the Fed will move slowly. “I think if they don’t do 50 this time, then there’s probably another rate cut coming before the end of the year.”
Rate cuts and impact on the economy
Memai wrote in a July 16th note to investors, “The next few rate cuts are more about the Fed taking back some of the misplaced policy tightenings of 2017-2018.”
He expects the US economy will likely be growing close to 2% and the yield on 10 year Treasury Bond will be closer to 2.5% by the end of the year. “This is certainly not the scenario in which the Fed must ease on a sustained basis,” Memani said.
He predicts the disinflationary pressures on the U.S. economy that appeared earlier this year are going to fade and the economic growth outlook will improve significantly.
“There is a rate cut that is imminent... I think the Fed is going to be in an easing mode for the foreseeable future,” Memani said.
That’s something President Trump welcomes. His tweets attack the Fed for moving too soon to raise interest rates last year and for missing opportunities to cut rates this year. Next week provides the FOMC a chance to seize an opportunity to cut and Trump tweeted a warning to the Fed “Don’t miss it again.”
Adam Shapiro is co-anchor of Yahoo Finance On the Move.