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What Trump is forgetting about in his war with the Federal Reserve

Brian Sozzi
Editor-at-Large

If President Donald Trump indirectly keeps pushing the Federal Reserve to slash interest rates by extending his contentious trade war with China, when sh*t really hits the fan during the next recession the monetary body may be paralyzed.

And that indeed wouldn’t be a good place for the Fed to be as it looks for ways to jump start a sputtering U.S. economy.

“I don’t think the answer is lower rates by any means. I also don’t think we are going to push this all the way to potentially breaking the cycle. I think this is much more about [presidential] posturing and taking a hard line stance and getting ready for the 2020 campaign election season,” explained PNC Financial Services Chief Investment Strategist Amanda Agati on Yahoo Finance’s The First Trade.

Agati added, “My concern is really that if we continue to cut, and cut and cut rates and then we get a reprieve on the trade front, then perhaps we have wasted precious ammo that we might not have at our disposal when the time really comes — when the cycle rolls over and we really do need to pull additional levers.”

To that point, count September 18, 2019 as a day when the Fed potentially wasted a bullet in its recession fighting arsenal.

The Fed cut interest rates again by 25 basis points to a new target range of 1.75% to 2% on Wednesday. It marks the second “insurance rate cut” by the Fed this year, and comes on the heels of slowdowns in U.S. manufacturing and the job market in large part from effects of the U.S.-China trade war.

Recession risk are rising

During a press conference with reporters, Fed chief Jerome Powell promised the FOMC would stay data dependent with respect to future monetary policy actions. But by and large, Mr. Market took Powell’s performance as a bit more dovish than planned.

Federal Reserve Board Chair Jerome Powell speaks at a news conference following a two-day meeting of the Federal Open Market Committee, Wednesday, Sept. 18, 2019, in Washington. (AP Photo/Patrick Semansky)

“Alongside the willingness to “act as appropriate,” we see the bar for further insurance in the form of interest rate reductions as relatively low,” Barclays strategist Michael Gapen said in a note to clients.

With that wink to markets of more rate cuts likely this fall, Powell may be poised to waste additional recession fighting bullets. And that garden variety recession appears to only be moving closer, according to a growing number of pros on Wall Street.

Credit Suisse strategist Jonathan Golub recently said in client research that recession risks are rising. Meanwhile, 38% of investors surveyed by Bank of America Merrill Lynch expect a recession over the next year versus 59% who see a recession as unlikely. That’s the highest net recession risk since August 2009.

At the Fed’s current cutting pace, rates could be zero by mid-2020. By then, Trump may have wished he didn’t clamor for lower rates, the economy could be barely growing and the Fed will have its hands tied. Try talking about that one at a campaign rally.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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