U.S. President Donald Trump keeps adding more pressure on Fed Chairman Jerome Powell to cut interest rates. Trump’s compulsion to cut interest rates comes at a time when oil prices are spiking, commodities are rising, and even crypto is recovering. An analyst stated that rate cuts would come in handy only when the economy is short on demand, ‘not when the world is short on oil.’
The Fed may keep rates steady
Jerome Powell is under immense pressure, as Trump continues to demand rate cuts from him during his last few months in office. Trump calls for rate cuts as the Federal Open Market Committee (FOMC) gathers today and tomorrow to decide on the rates.
Usually, the FOMC announces rate cuts, if any, on the second day of the meeting, which is tomorrow, March 18. However, according to the CME Group prediction market, there is no chance that a rate could come tomorrow.
As shown in the chart above, the probability of the rates remaining unchanged between 3.5% and 3.75% is 99.1%, leaving no second thoughts for a rate cut.
Oil, precious metals and cryptocurrencies thrive
With the ongoing war with Iran, the oil prices crept up, and precious metals like gold and silver have gone up, while the crypto market has also shown some growth.
As shown in the chart below, the total crypto market cap, which was at $2.28 trillion, has risen past $2.5 trillion since the war started on the last day of February.
After experiencing a minor collapse when the war ignited, Bitcoin is back on track. The coin tumbled from $65.8K to $63.8K on the same day. However, the flagship cryptocurrency is currently trading at nearly $75K.
Even the crypto market sentiment has become better as the traders have lost all fear about the war and the volatility that comes along with it. The Fear and Greed Index has now moved to the neutral zone, reflecting the overall mood of investors after experiencing extreme fear when the war started.
With the Strait of Hormuz, the world’s key oil chokepoint where about 20% of global petroleum passes through, being blocked, the supply of oil has drained, and the prices have shot up.
This increase in prices has translated to logistics, and suppliers have increased their costs to absorb the logistics costs. As such, the situation feels like inflation has diminished the buying power of the dollar. Hence, Trump called for rate cuts.
Rate cut does not address the problem
Rate cuts are useful when the economy is short on demand, not when the world is short on oil. The Iran conflict is pushing up energy prices and inflation risk, so cutting rates into that backdrop does not solve the core problem.
Analyst Lavneet Bansal
He further mentioned that, although rate cuts may lower funding costs a bit on paper, if markets start pricing in more inflation and more fiscal stress, the US can still end up paying more to finance the same war. That is the real tension behind calling for easier money right now.
