LIVE MARKETS-Struggling to find a reason for rate cuts

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STRUGGLING TO FIND A REASON FOR RATE CUTS

While most of Wall Street has been clinging to hopes for a resumption of U.S. Federal Reserve rate cuts, Steven Ricchiuto, US chief economist at Mizuho Securities USA, was out with a contrarian note questioning why on earth the U.S. central bank has any rate cuts on its agenda.

"The logic behind this desire to continue easy policy escapes me," said Ricchiuto adding that "inflation has clearly bottomed out at 2.8%, well above the Committee’s 2% target" while the latest jobs report showed new hiring at a solid pace and a jobless rate below the "so-called frictional rate of 4.5%."

The desire to cut rates despite the strong economic backdrop "can’t simply reflect the pressure being exerted on the Chairman" by U.S. President Trump to ease in order to support the administration's economic agenda, the economist writes.

Given the liquidity available, Ricchiuto says that the expansion is "fairly well-positioned to absorb any unanticipated external shocks that hit the system and/or ride out any idiosyncratic credit events that may be festering under the surface."

He adds that the only reasons he can imagine for cuts "is if the Committee feels policy was somehow overly restrictive despite the ample macro evidence to the contrary" or if it is worried about global deflationary forces taking root in the U.S.

But in that situation he argues that "maintaining a very tight labor market would be the best defense" as solid wage growth is the best deflation defense.

While such a situation would justify a bias toward easing he still argues that the rate cuts "being discounted currently appear overly excessive."

(Sinéad Carew)

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