David Rosenberg: Fed may be getting ready to cut
Federal Reserve chairman Jerome Powell looks as though he is now getting ready to cut interest rates, says David Rosenberg, chief economist at Gluskin Sheff.
Federal Reserve chairman Jerome Powell looks as though he is now getting ready to cut interest rates, says David Rosenberg. At his latest speech in Chicago this week, the head of the US central bank who has tried so far to strike a tough tone on monetary policy sounded far less "hawkish" than he has in the past. He made no effort, notes Rosenberg, to counter market expectations that there will be two rate cuts before the end of the year. Powell also noted that at some point in the future, US interest rates will once again hit the "ELB" (effective lower bound, or 0%), and that the central bank has to be ready for that.
The nod to lower rates helped markets rally strongly in the middle of the week. "Market-based odds of a move as early as July have shot up to 50-50 from just 20% a month ago." But while this "could certainly spark a brief rally," don't get too excited, says the oft-bearish Rosenberg. The Fed typically only starts to cut rates when the economy is heading for (or is already in) recession. "Investors with long time horizons... know that you don't go long on the first rate cut; you go long on the last."
One big risk in the next recession is that lenders to companies now have far less protection than at any time in the past (because the conditions "covenants" attached to loans are so lax), which means that they will lose more money during the downturn, as corporations default on their debt. This is how the next economic recession could turn into a financial one. "Hold on to your hat," he warns.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.
-
Government launches full review of parental leave and pay – what could it mean for you?
The government wants parental leave to be fairer - will its shake-up fix the widespread problem for families?
-
Nationwide: House prices see biggest monthly fall in over two years
UK house prices dropped by 0.8% in June, according to Nationwide. We reveal the top-performing and worst-performing regions