Blog, NewsBy Chip Meakem
The Fed just cut rates. A few thoughts from our Managing Partner Chip Meakem:
It’s a Global Market: We think about the Fed rate too domestically. While the connection between Fed Funds Rate and the US Treasuries is complicated, they are correlated. In a world of global capital flows, just about every other major economy in the world has 0 or negative rates right now. If you’re looking for a safe asset the US 30 year T-bill paying 2.58% is the deal of the century. Australia, a politically stable country with commodities backed economy is paying 1.191% for its 10-year. The US 10 year is paying 2.013% a ~70% premium.
We’re All Comparison Shoppers: The Fed has been behind its target inflation rate for a decade. This is where tech comes in. In just about every category of product or service, we now have global price transparency. Obviously, this is a gross oversimplification, but that’s what blogs are for. Prices aren’t going up because no one has pricing power anymore.
Deflation is Terrible: The most insidious economic condition is deflation. Look no further than Japan. We’ve had a decade+ of historically low rates. The Fed has about $4 Trillion on its balance sheet, roughly 20% of GDP and there was a large tax cut in 2017. These are massively stimulative actions and yet inflation is still below target. In the modern central banking era, the Fed can pretty effectively stop and/or control inflation. Short of turning on the printing presses (i.e. quantitative easing), there’s not much they can do to stop deflation. In aggregate, humans are pretty economically rational. When prices are falling, people stop buying. Once that cycle starts it’s very hard to stop. In a lesser of evils world, overheating the economy is far better than underestimating deflation risk.
Plus, if you’re the Fed Chair, it gets Trump off your back for a while. Cut away!!!