James Grant, founder and editor of Grant’s Interest Rate Observer, joins ‘Squawk Box’ to discuss what he expects from this week’s FOMC meeting and how the markets may respond.
James Grant: The Fed Will Cut In June
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Steve kind of laid out what the market wants isn't what the market needs and is it what the market will get.
I think this is becoming less about Keynes and more about Pavlov. The market is been conditioned to demand a rate cut when it feels a little weak in the knees and the Fed has been inclined to So Grant. I think that there is an almost uncanny consensus that the Fed needs to be easier and you can see it in the unlikely pair of Larry Summers and Donald Trump. Which is about as unlikely as consensus is. But I think it's a very hard consensus and I think it's based in some part on the shape of the yield curve which is everyone's favorite data now and indeed it looks as if the Fed were too tight. My question is you know the Fed could take a longer view. We had a tech problem 2001 the Fed commented that with the 1 percent funds rate in the hopes of levitating house prices to compensate for the decline in stock prices they succeeded in the wake of the mortgage difficulties of 2008. The Fed has given us approximately a decade worth of very concessionary monetary policy. And now there's you know I think they're going to cut in June but you wonder where it ends at least.
To even suggest week June or July. I think they're going to cut. Yeah I do.
And we just said that I said what he was going to say. Unfortunately I was to get very accurate predictions.
I want to take too much away but that's a big I thought that was because I thought that was almost misspeaking. I thought it was well thought they were gonna cut in July. I actually thought that was a mistake.
Oh no. Well it might be a mistake we'll know Wednesday whether was a mistake. That's my view is that they'll cut preemptively in June.
That is to say Wednesday meaning that they'll cut wants and hope to stem some of the concerns and be able to step back after that.
Well I think that they're going to cut more than once this year and start in June.
But certainly indicate what you think it's a mistake. You think it's going to it's gone. I think the excesses in the market. And Jim I'm not going take the words anymore. But when I was interviewing John Williams at the Council of Foreign Relations I called on you for a question. And you asked a marvelous question. Yes. And it's a question I'm sorry. Your answer.
Yeah. I said approximately that President Williams given the well-known tendency of very low rates to incite speculation and the misallocation of resources. And given the well observed tendency of the Fed to intervene to quash difficulties in the market is not the Fed now operating on the de facto dual mandate of arsonist and firemen and he said. That.
May have been he said no. Look I mean there's an experiment going on in the experiment now is. Yeah we messed up in the before the financial crisis by not supervising markets. We've now been given that power. So we're gonna run monetary policy and bank supervision on a separate track and they've come up with this fancy word called macro prudential supervision and nobody knows if it's going to work no matter how many syllables you have is me. I think that's it. It's inversely proportional to the effectiveness of macro prudential.
Me and Jim speak though to the China situation because to me that could change everything. If you think a deal is had and what that ultimately does to the economy or at least to the markets. Yes that a deal would be how the Fed should be thinking about that one way or the other how that should be in the calculus. You wonder what monetary policy can do to something as real as trade. And what the Fed could do by lowering its interest rate in the face of a non deal is to give people the idea that rates will still go lower and it is safer to buy securities that would be unsafe at a slightly higher rate of interest which feeds the the problem of misallocation and speculation built on the Fed's well intended to concern for.
The economy as a whole.
Jim do you think equity prices are too high here given where interest rates stand right now or I think that interest rates are too low.
Certainly equity prices with respect to bond yields are not especially high but nobody is getting paid a real rate of return as a bondholder the world over I mean the 10 year Treasury yields nothing after oh I misspoke in Argentina you can get a 13 percent real return on inflation linked security. Steve you writing this down.
I am. I'm just telling you a risk risk. You know a risk assessment on that. That 13 percent maybe underpay me Jim before we go I want to ask you about the pressure that the Fed gets politically now with the president making comments about the Federal Reserve. Do you think that has an influence at all inside the room. I think that the White House is getting inside the head of the Federal Reserve.
And I think these comments to a degree are warranted. I think the Fed ought not to be above politics Fed is a creature of the United States Congress. It ought to be answerable to the Congress therefore to the government therefore to the people. And I think to treat it as if it were some branch of churches that it would be the wrong approach. But I think that the comments coming from the White House are often. Brutal and rhetorically. And I'm not sure how. I mean when counted Trump in 2016 said that thanks to the zero percent rates that it's a false economy and a false stock market. And just because he got a new speechwriter it doesn't mean he was wrong. I think that's wrong originally. Yeah.