Was action earlier a blowoff?
US 5-year yields are down another 5.4 basis points today at 2.214%. They fell as low as 2.16% two hours ago in what looked to be a mini-liquidity event that has since reversed.
Still, the drop in yields is harrowing. 5s fell as low as 2.11%, which is far below the 2.25%-2.50% Fed funds rate. It came after Stephen Moore argued in the NYT for an immediate 50 bps cut.
The thing is, he's right. Or he's right if you believe the market is always right.
The problem is that Moore has a long history of being a complete clown but he's going to play to Trump's instincts and may lead to the President stacking the Fed with doves. It also creates a weird dynamic where Kashkari and Moore will be arguing for the same thing -- although Moore seems to think that commodity price inflation (which the Fed has little control over) is all that matters.
From the New York Times:
A week later, Mr. Moore laid out the commodity targeting plan on the opinion pages of The Wall Street Journal, his former employer. When commodity prices rise, the Fed would raise interest rates to prevent inflation, Mr. Moore and his co-author, Louis Woodhill argued, and it would reduce rates when commodity prices fall. Mr. Trump saw the piece, and he offered Mr. Moore the Fed post, which Mr. Moore said he had never previously considered.
"I never really thought about this, but, you know, I thought that - the more I thought about it, the more I thought this is economic policy right on the front line," Mr. Moore said. "That's what I do. I thought this would be an amazing experience, and hopefully I could work with Powell to get him shifted over to a more pro-growth" policy.
"I would use commodity prices as a guide," Mr. Moore added. "I wouldn't be doctrinaire about it."
Using commodity prices as a guide would have led the Fed to hiking rates in 2008. It would also create a bizarre dynamic where if the Fed cuts rates and the US dollar falls (thus pushing up commodities in USD-terms), then the Fed would be forced to turn around and hike again.
In any case, this rip in the bond market started before Moore's name came on the radar so it's not the main driver. The market is clearly worried about growth and sees low inflation ahead.
Here's my take: The market wanted to see the tax cut achieve more. It was a massive boost and the US only grew 2.9% last year. Meanwhile, the deficit is enormous and will need to be trimmed down. Q1 growth is looking meager and this year will be around 2%, with the market signaling risks to the downside.
If a huge tax cut can't generate growth, what can?
