Rebalancing and Converging

The Fed and interest rates have taken the back seat since inauguration, because the market has been busy digesting the actions and reactions tied to global trade. But as we get deeper into the weeds of the beautiful rebalancing, whereby China consumes more and produces less, and the US consumes less (is that possible?) and produces more, the Trump administration is realizing that the U.S. will need a softer rate environment to lower the fiscal burden, to help the average American with their debts, and to help US corporations through the uncertainty caused by the aggressive negotiation style of our president. If we look at the chart below, it will appear that the Fed will reach equilibrium rate around 3.2%, or 110 bps below where we are today, in a couple of years. That is, of course, provided that inflation continues to go down, to the infamous 2% level. It can be accelerated if GDP growth turns negative, or very low, or of unemployment starts to tick up more rapidly. But the chart below tells you that everything is starting to line up for a series of cuts over the next 18-24 months. Also, the 2 years treasury (missing in the chart) is paving the way to that 3%ish level. Next FOMC meeting: May 7th.

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