The chief investment strategist at Charles Schwab believes that a restrained Fed is one of the key reasons why markets are bullish.
In an interview on the Excess Returns YouTube channel, Liz Ann Sonders says investors prefer a calm and steady Fed, even amid pressure from President Trump to cut rates, as inflation remains elevated.
[adinserter block="1"]Sonders also notes that the Fed’s current pause is perfectly in line with its mandate of low inflation and maximum employment.
“I think part of the reason why the market is doing well is because the Fed is not cutting. A combination of because they’re not bowing to political pressure, and oh and by the way, neither side of their dual mandate suggests that they should be cutting.
Financial conditions are easy. The unemployment rate is steady, actually has been coming down. Inflation is still above their target.
So the conditions just don’t suggest that they should be easing.”
The investor points out that a Fed rate cut at this stage could backfire by tightening financial conditions and triggering a market drop.
She explains that borrowing costs are tied to the 10-year Treasury yield, a rate determined by market forces and not directly set by the Fed.
The Charles Schwab executive warns that a cut could push yields higher, making it more expensive for consumers and businesses to borrow.
“And there’s a distinct possibility that if the market feels the Fed is prematurely lowering rates, doesn’t have the incentive to do that based on their mandate, that you could have a repeat of what happened as recently as last fall – when the Fed cut by a 100 basis points and the Fed funds rate and the 10-year yield over the same exact span of time went up by a 100 basis points.
So this idea that if we just get the Fed to cut rates, that that eases borrowing costs for companies and brings mortgage rates down, suggests a misunderstanding of what rate it is that is tied to borrowing rates for corporations, for individuals.
I think part of the reason why the market has done well is because the Fed doesn’t have the conditions that suggest easing.”
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