My concern is that the Fed will begin to gain comfort in the functioning of short-term interest rates, then decide to reduce the balance sheet just before a shock coincides with less liquidity and super-high stock valuations.
Some Fed officials want another cut this year, and others could be convinced to do so if the economic data weakens. The Fed has continued to repeat the line that any decision made — cut, stay or hike — will be “data dependent.”
Last week the Fed pivoted so quickly that all of us watching the press conference got whiplash. The Fed went from expecting two hikes in 2019 to zero. (It did maintain its estimate of one hike in 2020.)
