The financial market's break party makes Fed rate cuts less likely

WASHINGTON / NEW YORK (Reuters) – Risk management has been rage since the Federal Reserve quit its rival at the end of last year. US stocks are back near record highs, and investors are saving the lowest wage bonds with just one smithy of extra compensation for the extra risk.

Traders working on the floor of the New York Stock Exchange (NYSE) in New York, USA, April 18, 2019. REUTERS / Brendan McDermid

The rebounding mood of Wall Street may be welcomed by a president who has been demanding Fed cuts prices after markets fell sharply last year, complaining that even pausing at the current level is the wrong call.

But if something does the "pause party" on Wall Street, the US central bank is even less likely to cut prices. Recent positive news on retail and export, which has eased concerns for a heavily weakening economy, makes the case for a reduction in interest rates even weaker.

Investors have at least been alerted and moved from projecting a reduction later this year, and now set the odds of just 50-50 that the Fed will move lower by early 2020.

Wall Street celebrates Fed & # 39; s & # 39; pause

The financial market, says some analysts, is evidence that Fed's interest rate increases last year were on the point, so that the economy could continue to grow, while the risk was in control. An additional charge at this stage will only be raising problems.

"The reason why they should keep the chance of a price increase on the table is due to financial stability," said Citi chief economist Catherine Mann in a comment on Wednesday at a financial stability conference at the Levy Economics Institute of Bard College.

After a decade of near zero interest rates, it is important to move towards a constellation of real estate prices that embodies risk, to get us into a more stable financial market, she says, noting that both stock prices and low bond yields show a market like still for sanguine.

In their criticism of the Fed, US President Donald Trump, advisor to White House's financial advisor Larry Kudlow, and possibly Fed nominee Stephen Moore have argued that lower prices would allow faster growth and be in line with Trump's financial plans. They claim that, with the risk of low inflation, the central bank does not need to maintain "insurance" against it by keeping prices where they are.

Delayed in that analysis, financial stability has been carefully integrated into the Fed policy since the financial crisis of 2007-2009. Mann spoke at a conference called in honor of economist Hyman Minsky, who explored how financial profits can build in good times, and relax catastrophically. The decade ago showed how deep the dynamic can happen to the real economy.

Financial Stability is not a formal mandate for the Fed, which, under Congress law, will maintain the two goals of maximum employment and stable prices. But since the crisis, the central bank has concluded that keeping the financial market on a steady boiler is a necessary condition for achieving the other two goals.

It does not mean a change in volatility or a guarantee of profit, but rather that the risk is properly priced and that the use of influence – investments made with borrowed money – is kept within safe limits.

Keep an eye on stock values ​​

It is an important reason why even politicians focused on maintaining high levels of employment, such as the Boston Fed President Eric Rosengren, at times has taken a hawkish tone in favor of rate increases. The worse outcome for workers, the Rosengren and others have said, would be to let markets inflate too much, and crash again, even if it involves risking slightly higher unemployment in the meantime.

Markets are currently "a bit rich," Rosengren said in recent remarks at Davidson College in North Carolina.

Although it was not enough to guarantee a price increase, he said, it claims against a reduction in speed. Overall, Fed officials, including chairman Jerome Powell, say they feel they are financially at risk, are within a manageable area, which political decision makers feel have been helped along with the rise of today.

The state of financial markets is "something the Fed must fight with," said Rosengren. "It is appropriate that interest rates be paused right now."

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Reporting by Howard Schneider and Trevor Hunnicut; Editing by Dan Burns and Andrea Ricci

Our Standards: Thomson Reuters Trust Principles.

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