A Benevolent Central Bank

It has become clear that Fed Chairman Jerome Powell will do whatever it takes to keep the expansion going.   In early January, the stock markets rallied after Mr. Powell softened his rhetoric and promised“patience” in setting the federal funds target range.   Initially, the Fed was to be on “autopilot” and proceed with two rate hikes this year.  That promise was called off because of slowing global growth and the fear that higher rates would cause a sharp fall in asset prices. Now the chairman has excited markets by announcing at theChicago Fed conference that “we will act as appropriate to sustain the expansion”—meaning that a rate cut could be in the cards possibly as early as July.  That sentiment was expressed earlier by St. Louis Fed PresidentJames Bullard.  Currently, the effective fed funds rate isabove the 10-year Treasury rate of 2.07 percent —and the yield curve is inverted, normally a sign of impending recession.  To restore a positive slope to the yield curve, the Fed would have to pencil in two 25 basis point cuts in its policy rate target range, which now stands at 2.25 to 2.50 percent.But what if the decline in long-term rates reflects a growing uncertainty about the impact of trade wars on productivity and growth, which is driving investors worldwide to hold U.S. government bonds as a safe haven?   When the demand for U.S. bonds increases, their prices rise and yields fall.  By lowering the fed funds target, the U.S. central bank would...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs