As described in this article, Trump recently tweeted that the Fed should lower interest rates immediately and should consider going to “negative” interest rates. We’re a long way from negative rates, but Trump has shown an uncanny ability to read the economy better than the Fed.
Trump’s call for negative rates may be a much better indicator of where markets are heading than anything from the Fed’s research department. This won’t happen all at once. The Fed moves cautiously and slowly.
Assuming the Fed keeps up its tempo of 0.25% rate cuts, it would take eight cuts (and therefore eight FOMC meetings) to reach 0% from the current 2% target rate. The Fed meets eight times per year. So assuming one cut at every meeting, it would take at least a year to hit zero.
The central bank may pause in rate cuts at one or more meetings based on economic data, so the entire process could take more than a year. Still, rates could hit zero before the presidential election in 2020, which is just over a year away.
Negative rates before the presidential election are unlikely unless the economy tumbles into a recession (also unlikely based on the best available data). But if Trump wins a second term (a 67% probability, according to my models), his pressure on the Fed will continue.
I recently attended a closed-door, off-the-record session with two senior Fed officials who indicated that negative rates are being seriously considered, even though no final decisions have been made. Rates may seem low today, about 1.85% on the 10-year Treasury note and 2% on the fed funds target rate, but they could go much lower as they already have in Germany, Japan and elsewhere. That means huge capital gains for investors who buy the notes today.
Trump’s economic forecasts have been highly accurate (better than the Fed’s). This may be yet another example with upside for investors who take heed.
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