Charles Schwab’s chief investment strategist believes that the markets have been bullish because of a Fed with restraint.
Liz Ann Sonders, in an interview with the Excess Returns YouTube Channel, says that investors still prefer a steady and calm Fed despite President Trump’s pressure to reduce rates. This is because inflation continues to be high.
Sonders notes also that the Fed’s current pause fits perfectly with its mandate to maintain low inflation while maximizing employment.
I think that the Fed’s refusal to cut is a big reason for the good performance of the stock market. They’re also not bowing down to political pressure and, oh, by the way… neither of their two mandates suggests they should cut.
The financial conditions are good. In fact, the unemployment rate has actually been decreasing. The inflation rate is above the target.
The conditions don’t indicate that the situation should ease.”
Investors point out that cutting the Fed’s rate at this time could have a negative impact by tightening up financial conditions, causing a drop in markets.
She says that the cost of borrowing is tied to the yield on the 10-year Treasury, which is determined by market forces rather than directly by the Fed.
Charles Schwab’s executive warned that the cut in interest rates could make borrowing more costly for businesses and consumers.
The Fed’s mandate does not give them the motivation to lower rates prematurely. This could lead to a similar situation as what occurred last year, when they cut the Fed Funds rate by 100 basis point and both the Fed 10-year yield and Fed funds rate went up 100 basis points in the exact same time period.
This idea, that we can lower mortgage rates and ease borrowing costs by getting the Fed to reduce rates, is a misinterpretation of how borrowing rates are tied for both corporations and individuals.
“I think that part of the reasons why the markets have done so well are because the Fed does not have conditions which suggest an easing.”
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Charles Schwab’s Exec: Markets are Rallying because the Fed is not cutting – This Is Why. may be updated as new information becomes available.
