A September rate cut is 'too close' to election: Strategist

The Federal Reserve announced its decision to hold interest rates steady, a move that followed the release of the Consumer Price Index (CPI) report, which remained unchanged in May. To discuss his perspective on Federal Reserve rate cut expectations, Bahnsen Group chief investment officer David Bahnsen joins Market Domination.

Bahnsen notes that the markets are "relieved that there wasn't bad news" in the wake of the CPI data and the Fed's decision. He acknowledges that while these economic indicators initially sparked slight volatility, the markets are reverting to "normal" as they realize that the Fed will not be cutting rates imminently and corporate earnings remain robust.

Turning his attention to the prospect of the Federal Reserve initiating a rate cut this year, Bahnsen says: "They won't cut in September, but they will still take out fifty from the curve by the end of the year." He elaborates, stating, "And the reason for that is that they couldn't cut in July... I think they would've cut a second time in September but not a first time, because now it's just too close to the election."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Angel Smith

Video Transcript

David Bonson, chief Investment Officer at the Bonson Group.

David.

Good to see you here.

Um, so it seems like market's pretty pleased with.

Well, not just the fed but also the CP I data this morning.

What's your reaction?

Well, I think it's more that the market was relieved that there wasn't bad news.

I mean, it, it's good news and, and the bond yields are really the greatest proof of that, but it's the um, traders and speculators that have to front run whether or not it goes the other way and that's what the big spike at the morning open was about.

And so you get 300 points just as a lot of these hedges and various positionings come off and then now you kind of go back to normal.

And what is normal?

Normal is the fact that the fed is not going to raise rates again, that the fed is going to cut once or twice this year and that earnings are good in the market and that the market is expensive.

That's all the normal and we know all that day by day, but some of these things just require a little bit of extra trading volatility around them.

And David, you know, just the, the reactions and the responses are now coming in from e economists.

I wanna get your take Ian Shepherdson over at Pantheon.

He, he says, listen, I'm kind of calling the feds bluff.

He says the feds gonna have to backtrack from this new dot plot.

He says, bottom line, he sees the labor market uh soft over the summer.

He thinks core P ce it's gonna come in better than Jay Powell expects.

He's still looking for that first easing in September.

And then he's telling his clients, I think the feds are gonna have to play kind of scramble to catch up here.

What's your reaction to that, David?

What do you think?

Well, the fed has already had to adjust its dot Plot, but the other way, a couple times this year and I don't disagree with Ian that it could happen.

But my expectation now is that they won't cut in September, but they will still take out 50 from the curve by the end of the year.

And the reason for that is because they couldn't cut in July.

I think they would have cut a second time in September, but not a first time because now it's just too close to the election and it's only 25 basis points.

It's totally immaterial in the real world.

And so why go do a quarter point right before the election and make them have to hear all the nonsense about it being political.

They'd rather just wait and get the 50 basis points out of the curve in November and December.

That's my expectation.

So, David, of course, you're not the only person who said that the election is a factor in the fed's decision making process.

Of course, we heard on the other side from Robert Kaplan, former Dallas Fed president who said as much as they are able, they try to divorce themselves from those political discussions.

It sounds like you don't buy it.

No, I do and I understand what you're saying, but that's kind of the point I'm making is that because I think they want to be divorced from the political.

That's an argument for why they will just wait.

In other words, this could cut either way, the appearance, they could be a of cutting, they can be accused of cutting for political reasons and they can be accused of not cutting for political reasons.

My point is that once you get to 4 to 5 weeks before the election and by the way, you know, absentee ballots are already going to be being cast at that point.

I don't think any of it would be substantively political.

I agree with and about Powell and the Fed mentality there.

I'm just referring to the optics that I think there's no upside in doing it when they can just wait.

I think the FOMC meeting, by the way, in November is the week of the election.

They can act 24 hours after the election and accomplish the same thing with their monetary policy aims.