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.
The U.S. produces about 13 million barrels per day and consumes 21 million, so higher oil prices could depress economic growth. But I’m not worried about that yet.
Where the economy might go from here is another conversation, but we do know that defaults on existing debt are relatively tame, meaning that consumers are not yet feeling overwhelmed.
The chairman appeared to be sending a message to the White House that its trade war is pushing the U.S. toward a recession, and that the Fed may not have the tools to bail us out if that happens.
If they do cut rates this afternoon, I’m growing convinced that the Fed will be one-and-done, and there will be an extended pause before we see any new action.
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.)
Rising home prices and mortgage rates are slowing down homebuyers. And the higher costs of land, labor and materials are making it more difficult for builders to deliver houses at the prices which are most in demand.
