Conditions as loose as 2021 call into question more Fed cuts
To be sure, the complicated debate about the Fed's next move includes many opinions on a host of issues, including the potential inflationary effect of tariffs, the impact of immigration curbs on wages and job growth, high mortgage rates and lofty government funding costs.
The Fed's own modeling suggests that its policy is still moderately "restrictive" relative to where long-run neutral rates should be, mainly because inflation is still above target, the jobless rate is near historic lows and real economic growth has rebounded from a first-quarter hiccup.
However, the Chicago Fed's national index of broad financial conditions in the U.S. economy has fallen to its lowest level in more than three years, suggesting financing in the economy is more than ample.
The index captures a blizzard of financial inputs from short- and long-term interest rates to equity and energy prices.
The likely culprits for its decline include the rebound in U.S. stock markets from April lows back to record highs, the dollar's plunge this year and crude oil prices running at a year-on-year decline of some 20% since April.
There are many other indexes of financial conditions, of course, but they mostly tell a similar story. Goldman Sachs' U.S. equivalent is back down to where it was late last year, just a whisker from its three-year low.
One takeaway from these readings is that despite trade uncertainty and sticky borrowing costs, the overall economy is doing just fine and has enough financial oxygen to continue chugging along, perhaps even a bit too much given the above-target inflation rate.
And, if so, the Fed's current policy stance may be less restrictive than it appears on the surface, even before slashing rates further as demanded daily by President Donald Trump.
In the U.S. economy today, both jobs and cash holdings appear plentiful. Business confidence has also rebounded after taking a sharp knock from the April tariff shock, a trend that July business surveys are likely to confirm this Thursday.
U.S. household deposits clocked in at $4.46 trillion at the end of the first quarter, less than $100 billion below the record peak of 2022. Cash-like money market fund assets, meanwhile, hit a record of $7.1 trillion earlier this month.
And U.S. stocks still continue to push further into record-high territory, with retail investors seen as key drivers of demand. Even frothier parts of the U.S. market, such as "meme stocks" and crypto tokens, are back in vogue.
Resuming rate cuts at this juncture could add significant fuel to that rekindled fire, an argument for using caution in doing so.
For all the focus on borrowing costs and credit as key metrics of spending, the "wealth effect" of rising stocks is powerful. Some estimates show a "wealth effect" from investments added as much as 1% to U.S. consumer spending last year. This was driven by the more than 20% of households with direct stock ownership and the over 50% with retirement accounts.
Trump's argument that Fed rates are too high and should be cut by more than three percentage points to 1% hinges variously on the idea that high mortgage rates are preventing people from buying houses and that U.S. government borrowing costs are too high.
Indeed, the likely hefty schedule of Treasury bill sales expected over the coming year may be the key reason for the White House's urgency.
So regardless of what political pressure is brought to bear, and even if tariffs don't prove inflationary, the Fed may struggle to justify steep rate cuts in this environment.
The opinions expressed here are those of the author, a columnist for Reuters
-- Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn. Plus, sign up for my weekday newsletter, Morning Bid U.S.
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'When you work there you're constantly under attack internally, except when something like this happens,' the executive says. 'They tend to fight hard amongst themselves in normal times, but when there's a crisis they say, 'We're backing you 100 per cent.'' Murdoch's support is not always longstanding, however. James Harding, the former Times editor who now runs The Observer, was quietly pushed out in late 2012 – reportedly after the tycoon baulked at his support for Obama in the presidential election. Could Tucker face a similar fate? It is far from the first time that Murdoch – a key inspiration for Logan Roy, the ruthless media patriarch in HBO hit Succession – has courted controversy or gone into battle against powerful foes. His reputation was cemented during the Wapping dispute, a year-long stand-off with print workers in 1986 in which the tycoon eventually broke the powerful unions. 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But his battle with Trump highlights the conflicting positions Murdoch is required to hold as the owner of news outlets that are, variously, sycophantic to Trump and doggedly determined to hold him to account. What's more, it raises fundamental questions about whether it is his commercial interests or passion for journalism that will ultimately win out. Murdoch once claimed that the reputation of his media outlets was 'more important than the last hundred million dollars'. Yet the tycoon has previously been accused of cosying up to China's communist regime and indulging censors in Beijing in an effort to protect his business interests. Ahead of his takeover of Dow Jones in 2007, a group of China-based WSJ writers accused the mogul of 'sacrificing journalistic integrity to satisfy personal and political aims'. In 1998, he ordered publisher HarperCollins to kill a book by Chris Patten, Hong Kong's last British governor, because of its critical stance towards Beijing. 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It had more than 4.3 million subscribers at the end of March, while Dow Jones posted quarterly revenues of $31m. Fox, which pulled in $1.6bn from its cable network in the same three month period, remains the real money-spinner, however. While British broadcasters are struggling to retain viewers in the streaming age, Fox News continues to dominate the US ratings with an average primetime audience of 2.6 million in the second quarter. At the same time, it has been making advances in its digital offering. Fox recently struck a licensing deal with Ruthless, a popular podcast hosted by Republican influencers, while it is set to launch a new streaming service this autumn. Murdoch's supporters argue that he will not be swayed by commercial interests. 'The value of those companies has only grown and I think he takes a really long view – certainly long for someone who's 94 years old,' says the former News Corp executive. Others believe Trump's decision to take on the mogul will backfire. Stephens says: 'By taking this suit he's potentially putting the entire Murdoch press offside. Is that sensible for a Republican president? Essentially the megaphone to Trump's base is held by Rupert Murdoch.' He adds that this is an example of the so-called Streisand effect, where efforts to cover something up only result in greater public awareness. It is not lost on many, however, that Murdoch may prove to be the last true press baron. The role of the newspaper proprietor has traditionally been a powerful one, steering a title's editorial direction and wielding influence over presidents and prime ministers. William Randolph Hearst, the inspiration for the titular character in Orson Welles' classic film Citizen Kane, is often considered to have helped push the US into the Spanish-American war at the end of the 19th century thanks to sensationalist reporting in his tabloids. Lord Beaverbrook, the Canadian-British newspaper publisher whose empire included the Daily Express, has taken credit for the downfall of David Lloyd George's post-war government in 1922. Murdoch must now decide whether he is up for a blockbuster fight with the president that would almost certainly define his legacy as a newspaper man. His stance will also be crucial for Tucker, whom he elevated from editorship of The Sunday Times to lead the WSJ newsroom in 2023. The Briton's willingness to make difficult decisions appears to have impressed Murdoch and she is generally well-regarded at the US newspaper, despite a backlash last year, when journalists plastered her office in Post-it notes in protest against job cuts. That was a minor skirmish from which she emerged unscathed. The stakes for Tucker now, as she comes under Trump's legal assault, could scarcely be higher. For Murdoch, the reputation he has cast for himself over decades as a bulwark of a free press is on the line. Murdoch's status is unique. Jeff Bezos, owner of The Washington Post, is undoubtedly a mogul and a far wealthier one, but with tech rather than media values. His tendency to intervene in his publication in ways that have pleased Trump has already come under scrutiny. 'This is the last of the big tycoons in newspapers,' says Murdoch's former lieutenant. 'There's just a lot less money to be made in newspapers than there was and so it won't produce these very powerful media tycoons in a world where the media landscape is pretty fragmented and atomised.' 'Any number of people might have more money than Murdoch and they might even desire to have that level of influence, but they may not know how to do it. It's a skill to remain relevant and ultimately what he's done is stay relevant.' As a result, the newspaper proprietor in its traditional sense – as a wielder of political power and influence – seems an endangered species. So as Murdoch faces down the president of the United States, it may be the last stand for the last press baron.
