It’s So Time to Cut Rates
Donald L. Luskin
Monday, June 3, 2019
It would take two cuts to un-invert funds-10. Powell: “your policy’s tighter than you think.”
Strategic view: 

The funds rate-10 year Treasury curve is so deeply inverted, it would now take two cuts to un-invert it – even though the canonical 2-10 curve isn’t inverted at all. Powell stated last year that the 10-year represents the neutral rate of interest, so this inversion means “your policy’s tighter than you think.” With his stated distrust of abstract quant models, and with inflation low, he has every reason and opportunity to cut. Powell is telling GOP insiders that he is in step with Trump’s pro-growth policy outlook, and is fighting the “deep state” in the Fed. Yet surely he finds it distasteful to be seen as caving to Trump’s wishes for rate cuts. A consensus for a cut as soon as June is forming. The probability implied in the futures markets is absurdly too low. That consensus will build rapidly, and Powell can hide behind it to justify a rate cut while preserving the Fed’s independence. When the cut comes, the funds-10 curve will smartly un-invert as the 10-year yield backs up and confidence and risk-appetite are restored.