Investors have a right to be concerned as most of the economic data indicates a recession coming. The data so far has shown us, terrible job growth, slowing home sales, and the inversion of the yield curve. Judging by these and many other metrics, the economy is not looking good. However, there’s one entity that’s here to step in and save the markets, not the economy but investors and financial institutions. Moreover, that intuition is the Federal Reserve or the Fed.
In the past several months, the FED has made statements about how it is ready to react to any recession that may occur in the US. They’ll dig through their toolbox and take the necessary steps to stop or prevent the next recession. When asked what tools they planned to use, the Fed stated it would cut rates and resume quantitative easing.
If the FED were to enact these monetary policies, it would look as if they’re giving in to the political pressures of President Donald Trump. Since 2017 Donald Trump has been pressuring the FED to cut rates rather than hike them. Trump believes that if the FED never hiked rates, the US stock market would be 10,000 points higher than currently.
Furthermore, on June 20th the Federal Reserve gave an outlook of cutting interest rates, possibly by 25 or 50 basis points as early as July of this year. However, they maintain their stance that the Fed is independent of Congress and the President. Fed Chairman Jerome Powell insists that his actions are not caused by political pressures to cut rates.
The FED Craters To Market Pressures
Even though the FED chairman insists Washington is not pressuring him, perhaps he’s pressured by the markets. So far, the Federal Reserve has done everything the markets expected. If the markets want rate hikes to stop, the Fed will stop the rate hikes. In fact, we had witnessed this back in December of 2018. The Fed’s determination to raise rates four times in 2019, caused the stock market to tank.
In last December, the stock market began to experience the worse holiday season since the 1930s, forcing the Federal Reserve to backstop on their rate hikes for 2019. After the FEDs announcement, the stock market stopped hemorrhaging and resume buying again.
However, fast-forward to today, and the markets now want the fed to cut rates in July. Moreover, it’s very likely the Federal Reserve will grant that wish. Due to recent bad economic data, market analysts predict a 100% rate cut in the July Federal Open Market Committee (FOMC) meeting. If the Fed responds to this request and bends at the will of the markets, can we honestly believe that the Fed is independent?