David Rosenberg: Fed may be getting ready to cut

published 10 June 2019

950_MW_P17_Strategy_Col — Jerome Powell of the Federal Reserve

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.