President Donald Trump has long been critical of the Federal Reserve and its chair, Jerome Powell. It’s no secret President Trump finds the idea of negative interest rates appealing. He’s been rooting for the Fed to reduce interest rates down to zero. Much to his dismay, the Fed slashed the federal funds rate by only 25 basis points this week.
Powell announced the Fed’s latest decision on September 18. Currently, interest rates are in the range of 1.75%–2.00%. Powell dismissed the idea of turning to negative interest rates, even if there’s an economic crisis.
How market gurus feel about the Fed’s decision
Some market gurus, including Warren Buffett, advise investors not to worry about the Fed. In Buffett’s words, “Be content owning a good income-producing asset.” Other prominent personalities such as Leon Cooperman, chair and CEO of Omega Advisors, feel that the Fed’s rate cut decision was unnecessary. Cooperman said, “You’re screwing the savers.” Buffett’s advice is generic for any investor. However, what about investors who aren’t on par with his expertise?
Cooperman has listed many factors indicating why a rate cut wasn’t required. Let’s take a closer look at those factors.
Consumer price index
The CPI (consumer price index) measures price deviation in retail products over different periods. CPI calculations involve the use of weighted average prices for a basket of essential consumer goods and services. The CPI denotes the purchasing power of individuals within the country. The US CPI has seen a steady increase in 2019 so far. The CPI for August increased to 256.30 compared to 256.16 in June.
The economic indicator stands in contrast to decreased inflation levels. The current rate of inflation from August 2018 to August 2019 was published on September 12. The inflation rate for this period dipped to 1.7%, meaning that although the consumer capacity to purchase is increasing, the value of the currency is depreciating. Again, this isn’t a good sign for the US economy in the long run.
Increasing retail sales
Retail sales have been seeing an uptick for the last six months. They saw an increase of 0.4% in August. Retail sales numbers in August stood at 0.8% compared to the expectation of 0.2%. An increase in customer spending is a good sign of economic growth. It explains why the trade war could have a suppressive effect on the economy: increased tariffs could dissuade customers from making retail purchases (because of the tariffs, prices are high). They also might lead to a higher trade deficit and a fall in retail sales, which could, in turn, hamper the manufacturing and labor industries. The cascading effects could lead to increasing prices and affect consumer purchasing power.
Atlanta Fed’s expectations
An increasing number of retail sales will encourage businesses to hold higher amounts of inventory. Increased stock levels are a good indicator of real GDP growth.
According to the Atlanta Fed, the economy is slowing down this year. The growth trend for the first quarter was 3.1%, which dropped to 2% in the second quarter. The third-quarter growth rate is expected to be merely 1.8%.
The automobile sector is the most significant contributor to retail sales in the US. In the last quarter, General Motors (GM), the largest US automaker, posted favorable revenue numbers in the US. Its second-quarter sales in the US were up to 153,000 units, 11% higher than in 2018. GM will announce its third-quarter earnings results in October.
Even electric carmaker Tesla (TSLA) seems to have a bright future ahead of it. With its focus on climate change and the use of renewable energy, Tesla’s market share is growing at a fast pace.
A general view of the economy
Trump seems to be looking at the federal funds rate in isolation. His view on rates for savers is restricted. Even though Japan and Europe have negative interest rates, their strategies aren’t doing much to spur their economies in a hopeful direction.
With time, such interest rates are likely to affect long-term savings disastrously. With no saving incentives, capital creation could reduce over time. Banks might promote loans and debt issuances. Lower interest rates might also aid in the lending process. Repayment capacity will take a hit if individuals don’t have savings. Another hypothetical is that people won’t borrow even when they’re being paid to do so. In this worst-case scenario, the economy would eventually move toward depressionary tendencies.
Cooperman suggests that the stock markets are reflective of views on US leadership. At least from the market’s perspective, President Trump still has significant sway in the results of the 2020 presidential election. Things could change drastically if Senator Elizabeth Warren proves a worthy competitor. For a detailed discussion about Cooperman’s thoughts on US leadership, check out Leon Cooperman: Trump Is Better than Elizabeth Warren!