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By G. Steven Bray
Interest rates have settled back into a narrow range while markets await the Federal Reserve meeting next week. The Fed has strongly telegraphed its intention to cut short term rates, and recent positive economic data has convinced markets it will only be a quarter point cut. So, with that decided, what possible motivation could rates have to move?
Well, I’ll give you a couple, but I think they’re outliers. The first is headlines from the Middle East. So far, the US and its allies seem content mostly to ignore Iran’s provocations, allowing the punishing economic sanctions to continue to work. Should Iran get more desperate and start a shooting war, interest rates will tumble quickly.
The second is the Chinese trade tiff. I’m calling it a tiff because despite the doomsday prognostications from the experts, the damage to the US economy seems to have been quite limited. The Chinese economy, on the other hand, seems to be suffering. Should the Chinese finally decide the pain is too great and strike a deal, it will relieve some of the uncertainty that’s been keeping rates low.
Absent those events, I think it’s a balancing act between weakening foreign economies and the still-strong US economy. And as long as we remain in balance, rates really don’t have any motivation to move.