Party like it's 1995.
"some kind of global factor" causes an insurance ease (or two, ...) Gavyn Davies concludes in yesterday's FT that "insurance" rate cuts by the FED are imminent.

"In the absence of an outright recession, this action would remove much of the downside risk facing the equity market. In fact, bulls will point out that the equity market surged 14 per cent in the six months that followed Alan Greenspan’s first “insurance” cut in 1995."

Mr Davies references Fed Vice Chair Richard Clarida, May 30th:

  • Faster productivity growth and rising labour force participation are holding inflation down
  • Inflation expectations are very well anchored.


  • The Fed is of the view that it can ignore the inflationary risks from higher tariffs
  • Interest rates should be reduced, perhaps pre-emptively, in order to mitigate a future slowdown in growth.
  • The market now prices a rate cut in July and an overall cut of 100 basis points before the end of 2020.
  • This is news. The median dot in its March rate projections showed an increase of 25bp next year.
  • Markets have been protected by a much quicker, and more dovish, response from the Fed.

I recall Gavyn Davies from the 1990s as Chief Economist Goldman Sachs and one of the Chancellor of the Exchequer's "wise men" during the 1992–1997 UK Parliament.


Implied Probability of a July 2019 Rate Cut by the Fed

Emboldened trade negotiations?
Moral Hazard I

MST US Economists, Julia and Laura from MACROPOLICY PERSPECTIVES LLC now forecast a July rate cut with another to follow in September, stating:

"The current situation provides a unique situation of moral hazard. The more the Fed acts preemptively to keep financial markets accommodative and to underwrite future growth, the more embolden President Trump may feel in trade negotiations and the greater risk that the trade war escalates into a material supply side shock."

"Act as appropriate to sustain the expansion"
Moral hazard II

Jay Powell, Chairman of the Federal Reserve, signalled the central bank stood ready to cut interest rates, saying it would “act as appropriate to sustain the expansion” amid the economic impact of escalating trade wars (FT 10Jun19)

That has generally been seen as a pledge to act swiftly if the momentum of the economy slows further.

The RBA cuts for the first time in 3 years
Moral Hazard III

The RBA cut rates 25bp as expected to 1.25% after 3 years without change.

Mortgage rates were dropped by all banks to near 60-year lows.

According to Credit Suisse, the RBA has two problems to solve. Firstly, it must determine where the neutral rate lies. Secondly, it must determine how far the cash rate needs to be set below neutral.

Meanwhile in Europe...
"whatever it takes” Draghi shapes policy from beyond
Moral Hazard IV

European Central Bank’s president, Mario Draghi steps down on October 31st.

However, on Thursday the ECB president revealed that the bank’s governing council had begun “granular” discussions about reviving quantitative easing perhaps at the ECB’s meeting in September, his second last before he steps down.

Further, he has created an expectation among investors that if action is needed, the ECB will react with more QE and rate cuts even beyond his October 31 departure date and that ECB action must be coupled with more government spending.

It is barely worth mentioning that he insisted the bank did not have a bias towards increasing rates.

He explained that inflation expectations were sliding around the world, blaming it on “some kind of global factor”. (FT)