Traders are pricing in a 100% chance that the Federal Reserve will cut interest rates at its next meeting on September 18, according to the CME FedWatch Tool. Fed funds futures indicate only a 16.5% likelihood of a 50 basis point cut.
Stephen Moore, former economic advisor to President Donald Trump and almost-Fed board nominee, says that’s not soon enough.
“The Fed should have an emergency meeting next week, not wait til September, and lower interest rates by 50 basis points,” he told Yahoo Finance’s On the Move.
Commodity prices have been declining over the past year, in what Moore sees as a signal of deflation. He has said commodities provide a more accurate inflation picture than the Fed’s preferred model, which measures personal consumption expenditures (PCE).
WTI crude (CL=F), for example, has fallen roughly 18% over the past 12 months, with wheat and coffee showing similar declines. Copper (HG=F), often viewed as a global economic indicator, is down nearly 7%, and soybeans about 2.5%.
“That’s a pretty good indication that we don’t have rising prices in this country, that we’ve got a threat of declining prices. Deflation can be as bad for the economy — if not worse than — inflation,” said Moore, an economist for The Heritage Foundation. Meanwhile, gold prices (GC=F) have rallied 24% and the U.S. Dollar Index (DX-Y) has risen about 2% in the past year.
“That demand for dollars is not being accommodated by the Fed, so I’m very worried about a deflationary spiral right now,” said Moore.
Is deflation really coming?
In March, Trump announced that he planned to nominate Moore to be a governor of the Federal Reserve. Less than two months later, Moore withdrew his name from consideration.
Moore has been a longtime critic of the Fed. Amidst and after the financial crisis, he warned that interest rate cuts would stoke inflation. He then told the Washington Post last August, “‘I have to confess: I was wrong about inflation in 2009 and 2010. I thought there would be a lot of inflation with the Fed lowering rates to practically zero, and that was wrong.’”
Peter Borish, chief strategist at the Quad Group, has long warned that falling commodity prices were a sign of coming deflation. But he disagrees with Moore about the prescription. “Cutting for cutting sake is a mistake in my opinion and will send a super negative message to the market.”
The view that deflation is coming is by no means a consensus, although price growth has been muted. The U.S. Labor Department said Friday that wholesale prices rose only 0.2% in July, after a 0.1% increase in June.
The impact of tariffs
Goldman Sachs Chief Economist Jan Hatzius predicted on Friday that tariffs on Chinese goods have stoked and will continue to spur inflation.
“Our analysis of consumer prices, imports, and tariff rates in tariff-affected goods categories suggests that most tariff costs were passed on to consumers and that there were sizable price spillovers as well,” he wrote in a note to clients.
He said that tariffs have boosted year-over-year core PCE by 0.10%-0.15%, and the next round of tariffs, set to go into effect on September 1, will add another 0.2%.
Moore acknowledges that there have been costs to the trade war even as he hews to his deflation argument.
“Do I support what Donald Trump is doing on China? Yes. is this imposing a cost on Americans? Yeah, it is. But the question is, when are we going to stand up to them? Are we going to stand up to them now or in two or three or five years from now when they’re stronger? I view this as short term pain for long term gain.”
He also said that equity markets have overreacted to the ratcheting up of the trade war in the past week.
Julie Hyman is the co-anchor of On the Move on Yahoo Finance.