Submitted by Taps Coogan on the 8th of July 2019 to The Sounding Line.

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Independent Strategy’s David Roche recently spoke with CNBC and lambasted the Fed’s preemptively dovish policy shift as well as the diminishing utility of the ‘Fed Put’ in supporting markets and the economy.

Some excerpts from David Roche:

“I don’t think the Fed will bend to this (political) pressure. I think the Fed has already got a very low pain threshold. It seems to be operating on the basis of anticipating anything bad that might, might, might happen to the economy. But, I think the markets are so drugged now on low interest rates and easy money that any disappointment on cutting rates immediately results in equities going down… If the markets get the idea that interest rates may not be cut the way they want, then bang the markets go down. (The Fed Put) is getting tired, like myself. There is only so many times you can do this and eventually the market will have less and less marginal effect… The markets can stay where they are because they know the Fed has no tolerance for pain. So with all this completely overpriced corporate and other poor quality debt, I think it is eight out of ten of the world’s major sovereign bond markets with negative yields, you can’t really afford to increase interest rates cause the whole sand pile will topple over and come tumbling down. So, the Fed won’t do that. On the other hand, neither is it going to do things like cut interest rates by 0.5% at the next meeting. That was always a dream. If you are lucky you’ll get 0.25%. If you are really unlucky, you’ll get nothing. You’ll get them later in the year, but the markets won’t wait for later in the year. The markets will immediately come down. So, it’s very very risky out there are the moment.

“I think (Powell) is going to resist (political pressure). But, then you have to look at Powell, the man himself. Powell… is a very dovish person. The Fed’s pain threshold from Yellen to Powell has come down by about a meter. Now, they can’t bear any pain. Not before it happens in the data but when they think it might happen in the data because something in the financial markets is telling that possibly an inverted yield curve might possible be telling that down the road the US economy will weaken. Now that’s a lot of ‘ifs.’ But, the Fed reacts to it. So they’ll cut interest rates. I am pretty convinced of that. But I don’t think they’ll give the market what they expect.”

“…There are only two types of fuel in the market tank. One is trade: no trade war please. The second is interest rates: cut them please. If (markets) don’t get both, they’ll go straight down.”

The Fed has painted itself into a corner. Either it starts cutting rates now, even though domestic growth is adequate and interest rates are low, or it tries to hold off. But if it tries to hold off, markets will tumble, the Fed will panic, and the Fed will end up cutting rates by even more. Markets may recover, but the Fed will simply end up facing the next slowdown with even fewer policy tools. It’s a monetary policy doom-loop and the Fed is stuck in it. The only way out is to embrace recessions as a normal and healthy part of the economic cycle. Stop trying to delay them and focus policy on making sure that recessions don’t cut too deeply.

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