Trump Could Set Interest Rates If Elected ...

Trump could set interest rates if elected ...
If elected President, some Trump advisers argue the president should be consulted on interest-rate decisions. Former President Donald Trump's political operatives are putting together a plan that would give him unprecedented influence over the Federal Reserve, including a provision that could make him an "acting" central bank board member, according to a report from The Wall Street Journal.

It's a great idea. Announcements of changes to Fed rates would probably be announced to paying subscribers on Truth Social first, boosting subscriptions. Insiders will also benefit from membership of an exclusive hedge fund group in a new division of the Trump Media and Technology Group. Could that happen? Not really, or could it?

The Dream of Fed Rate Cuts Is Slipping Away ...
It's bad enough in the US at present. The Dream of Fed Rate Cuts Is Slipping Away, according to the Wall Street Journal. Investors are backing away from expectations the central bank will reduce rates in coming months.

The next move could well up. 3 month Treasuries have risen to 5.5%. Twelve month Treasuries trade at 5.25%. Ten year bond yields have jumped 50 basis points to close at 4.7% this week.

Traders are now betting on a rate hike. This shift comes after unexpectedly strong US economic data, combined with hawkish mutterings on the part of Fed officials. Options markets suggest there is a one-in-five chance of a rate rise within 12 months.

What's the problem ...
Markets are spooked by the rise in US inflation in March CPI basis to 3.5%. Core inflation excluding food and energy increased to 3.8% over the year. CPI inflation peaked at 9.1% in June 2022 in this cycle. It then fell to 3.0% in June 2023. It is now on the rise again. Bad.

Growth is exceeding expectations. GDP growth accelerated to 3.0% in the first quarter of 2024 compared to 2.5% in 2023. Markets were slightly misled by the statement from the Bureau of Economic Analysis (BEA) which suggested real gross domestic product (GDP) increased at an annual rate of 1.6 percent in the first quarter of 2024. This is based on a quarter on quarter comparison. We always use the year on year data which confirmed growth of 3.0% year on year. That's the one to watch!

Our current Friday Forward Guidance is or was, "We continue to model U.S. base rates peaking at 5.25% in 2023 moving to 4.50% in late 2024. We expect the first cut in June."

This seems unduly optimistic. The latest thinking from the Federal Reserve, as of April 2024, indicates a cautious approach towards cutting interest rates. Persistent high inflation could delay any reductions until later in the year.

Federal Reserve Chair Jerome Powell (time limited if Trump is elected) has expressed recent data have not provided greater confidence that inflation is fully under control. Instead, the data suggest inflation may remain elevated for longer than previously expected. This could extend the period of higher interest rates.

Powell's comments imply the Federal Reserve might not proceed with the three quarter-point rate cuts this year that officials had projected during their March meeting. The Fed chair has indicated that if inflation persists at high levels, the Fed could maintain its current interest rate stance for an extended period.

So what to expect now? We model U.S. base rates peaking at 5.25% with no further rate hike probable this year. We would now expect two rate cuts possible this year but beginning in July or possibly as late as September. All will depend on inflation and the growth rate. Surprise! Surprise! The cut  to 4.5% may have to wait until Trump is in office (or in jail) ...