Do not underestimate Trump's determination: How will the US "cut interest rates"?

Fears are that the Fed rate cut is “politicized,” but analysts believe investors may be underestimating a range of traditional and non-traditional policy tools the U.S. government may use to keep long-term interest rates down. This article is based on an article written by Li Xiaoyin and compiled and written by TechFlow. (Synopsis: Circle’s rate cut dilemma: Fed crushes profit margins) (Background added: The market celebrates the “hidden crisis” of September rate cuts, and Ball’s speech is not as dovish as it seems) Is it a “politicized” rate cut or a data-driven rate cut? The Fed (Fed) monetary policy meeting will take place this month, and the current market focus is on whether the Fed’s independence will be undermined and whether the upcoming rate cut will be “politicized”. Recently, Peter Tchir, head of macro strategy at Academy Securities, posted that this concern has fueled a widespread expectation that even if the Fed initiates a rate cut, it will only depress short-day interest rates, and long-term yields will face upward pressure due to inflation concerns. At present, this view has become mainstream in the market and guides the position layout of many investors. However, Tchir believes investors may not be thinking outside the box enough to underestimate the government’s plan to lower interest rates. In addition to traditional monetary policy, the U.S. government is likely to take a series of unconventional measures, including adjusting the Fed’s balance sheet, changing the way inflation data is counted, and even revaluing gold reserves to achieve its goal of lowering long-term interest rates. Tchir added that these potential policy options go beyond a mere rate cut and could involve a synergy between the Fed, the Ministry of Finance and even accounting standards. “Politicized” rate cuts or data-driven rate cuts? Market concerns about a “politicized” rate cut may have overlooked the economic justification of the rate cut itself. If there is enough reason at the data level to support a sharp rate cut, then the market panic about long-term interest rates may not appear. Tchir noted that economic data was showing signs of weakness long before officials were divided on the issue of rate cuts. For example, at the July Fed meeting, two officials disputed the decision not to cut interest rates, and the June employment data released since then was revised sharply downward; Bauer (Jerome Powell)'s speech at Jackson Hall (Jackson Hole) also showed a dovish stance. These indications are that the case within the Fed for a rate cut may be stronger than the minutes reveal. Tchir argues that a 50 basis point rate cut in September is well within the “reasonable” range and cannot simply be seen as politically driven if subsequent employment data fails to show strong improvement. If the rate cut is seen as justified by the market, the “alarm” expected by investors – that is, the sell-off of long-term bonds – is unlikely to materialize. Another reason the U.S. government is considering unconventional options is that the effectiveness of traditional monetary policy tools is waning, Tchir argues. The article explains that affecting the economy only by adjusting the federal funds rate at the front end has a “long and changeable” time lag in its transmission path, and the effect is difficult to assess. Within months of the policy going into effect, any factor such as a trade war or geopolitical conflict could change the trajectory of the economy. Moreover, since the era of zero interest rate policy, many corporate, individual and municipal bond issuers have locked in long-term low interest rates, which has made them much less sensitive to changes in front-end interest rates. This means that the transmission of monetary policy through short-term interest rates is no longer as effective as it used to be. What might be a “toolbox” of unconventional policies? If traditional tools are not effective, the government may open its “toolbox” of unconventional policies and intervene directly in long-term interest rates. Aggressive rate cuts paired with forward guidance One possible strategy is to “get it done”. For example, a one-time sharp rate cut of 100 basis points while promising to keep rates unchanged for the coming quarters unless the data changes dramatically. The move is intended to quickly dispel continued speculation about the path of future rate cuts. A one-time rate cut of 100 basis points would require an extremely steep yield curve to keep the 10-year yield above 4%, which may be a difficult task for the “bond market” (bond vigilantes). “Attacking” inflation from the data level Another strategy is to directly challenge the validity of inflation data. The heavily weighted portion of housing costs in the current US CPI is artificially pushing up inflation data due to its lagging algorithm of the “owner’s equivalent rent” (OER). Tchir noted that new indicators prepared by the Cleveland Fed show that real rental inflation has fallen back to normal levels, well below housing inflation in the CPI. By highlighting such data discrepancies, the U.S. government can effectively reduce inflation fears in the market and clear the way for interest rate cuts. Perhaps the core means of restarting the “Twist operation” (Operation Twist, OT), by selling short-term U.S. Treasuries and buying long-term U.S. Treasuries at the same time, in order to lower long-term interest rates. At present, the Fed’s balance sheet is heavily skewed towards short-term bonds, holding about $2 trillion in bonds with maturities under 7 years, compared to only $1 trillion for bonds with maturities over 15 years. Analysts envision that the Fed could sell about $1.2 trillion in bonds with maturities of 3 years and below, and use the funds to buy long-term bonds with maturities of more than 20 years. Tchir pointed out that this move will nearly triple the size of the Fed’s holdings in the ultra-long bond market, and the purchasing power will be enough to affect or even control the ultra-long bond market, which accounts for about 50% of free float, thereby directly depressing long-term yields. Other potential options Other, more disruptive options may also be considered. For example, the yield curve control (YCC), although there is no precedent in the United States, but it has been practiced in Japan, it is not inconceivable for a government accustomed to “setting prices” through tariffs. In addition, revaluing US gold reserves is also an option. It is estimated that a revaluation of the official US gold reserves at market value would generate an accounting gain of about $500 billion. This is a complex move, but it is an effective distraction and may fund other investment plans. Tchir added that the move could lead to a weaker dollar, but it could be “a feature, not a flaw” for a government that aims to improve the trade deficit. Related reports All declines are paper tigers, and the rampaging cottage season brought about by interest rate cuts is in the fourth season? Is the market bound to rise after the Fed’s September rate cut? Trump shouts economic data falsification “cut interest rates immediately”: Announce the new chairman of the Federal Reserve and the new director of labor statistics in three days "Don’t underestimate Trump’s determination: how will the United States “cut interest rates”? This article was first published in BlockTempo’s “Dynamic Trend - The Most Influential Blockchain News Media”.