Once again, the FOMC will have the opportunity to demonstrate their priorities. Will they cut rates again, ostensibly in an effort to stave off a recession? Or will they keep their powder dry and risk a market meltdown?
Mohammed El Erian, in a wonderful moment of truthiness this morning on CNBC, argued that cutting rates is a bad idea. Referring to the ECB’s experience:
It is not only ineffective, it is actually harmful to the long-term stability of the economy. It is undermining the financial sector; it is undermining the provision of long-term protection services; it is allowing zombie firms to survive; and, it is contributing to resource misallocation. On top of that, we see an increase in the saving rate in Germany, because people are compensating for the low rates. I don’t understand why it is we’d want to follow the path of the ECB.
Of course, one person’s resource misallocation is another’s reasonably priced bull market. Like a insecure lover, the market desperately needs the Fed to continue showering it with compliments (the latest iteration of not-QE) lest it look in the mirror and discover the extra pounds and wrinkles which time has wrought.
Nothing has changed in our outlook from Monday. Unless the Fed manages a dovish surprise, which is highly unlikely, yesterday’s highs should stand for quite a while…… and volatility should spike much higher in the days ahead.continued for members…
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