LIVE MARKETS-When it comes to rate cuts, should the Fed fish or cut bait?

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WHEN IT COMES TO RATE CUTS, SHOULD THE FED FISH OR CUT BAIT?

Presidents always want lower interest rates, and the current one is no different. However, Brian Reynolds, chief market strategist at Reynolds Strategy, does not believe the Fed should ease right now for a number of reasons.

As Reynolds sees it, tariffs are not even set yet, so consumers and businesses haven't had time to fully react to them. Additionally, he believes how companies decide on the future of "tariff-eating vs. market share will have a large impact on the balance between higher inflation and lower growth."

Meanwhile, Reynolds cites risk of a repeat of the late 70s when the then Fed Chair opted for an easy monetary policy in order to support economic growth. However, that easy money instead fueled inflation.

Reynolds' caution is that back then, the next Fed Chair had to implement a tighter monetary policy, spawning two recessions, until inflation was under control.

Bond investors are another reason Reynolds believes the Fed should remain at bay on rates.

Reynolds notes that the Treasury yield curve has "an unusual bowl shape between 3 months and 10 years":

His worry is that the Fed caves to political pressure, and bond investors lose faith in the Fed, causing that “bowl” shape to turn into a “dome” shape, pushing yields higher and adding to the debt service and budget deficit as the U.S. issues shorter-maturity debt.

Additional concerns Reynolds has include the potential for further dollar weakness to stoke inflationary pressure, as well as the fallout from financial engineering.

"A Fed ease could turbocharge this process and lead to a financial market overheating in 2026. Thus, we would prefer that the Fed wait to see how these dynamics play out before making a politically induced decision," writes Reynolds in a note.

(Terence Gabriel)

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