The Fed…the UK, Trump and Biden

The US Federal Reserve and Interest Rates…

After 2 decades with US interest rates way below their long-term target (the ‘neutral policy position’ is about 4% for cash), the Federal Reserve must be feeling comfortable.  Yetserday’s CPI print is the first negative month-on-month figure, a few more of which might put the inflation bear to sleep.  So what would the Fed be thinking of doing?  Absolutely nothing is my thinking.  With the economy bounding along, unemployment plumbing lows and inflation under control there is no reason for the Fed to lower interest rates without a crisis to rescue.

Yet the markets are predicting the Fed will cut rates as early as September.  When rates were stuck below 1% for years, I remember the markets were almost entirely bearish about rate hikes that never materialised.  The ‘lower for longer’ camp had almost no members.  The ‘higher for longer’ camp would seem the place to be now, but it, too, has no friends.  I can see the cash rate remaining at 5% at least until the next recession.

… the UK election numbers and what they mean for Trump-Biden.

My theory of the thoughtful swinging voter is that they make their minds up when they are in the polling booth, based on money and mischief.  They may enter the voting venue intending to do one thing but they can easily change their mind while there.  This is impossible to observe however the ‘exit poll’ is a near proxy for measuring this behaviour.  People are more likely to tell you what they have just done, since it is fresh in their memory and they can fill out a mock ballot with the confidence of anonimity. The exit poll from the UK election predicted Labour to win 410 seats and the Conservative share of the vote to be severely reduced by a competing right-wing party Reform UK, making the UK first-past-the-post system favour Labour.  In fact, the Labour party won 412 seats and the Conservative party’s vote was decimated.  The exit polls were amazingly accurate, based on a stratified sample of 20,000 exiting voters at 150 polling venues. (Labour’s vote share was only 33%, meaning that the huge seat margin will be cut or eliminated if the conservative forces can recombine.

So what does this say about the looming Trump-Biden electoral battle.  First, the propensity for voters to decide their vote in the polling place means that either candidate can still win.  Second, the money and mischief theory of voter behaviour that I have previously espoused is relevant here.  [Swinging voters respond to promises of money and vote for the candidate who is more likely to piss-off the intelligentsia] Trump is firmly inside the voter’s hip-pocket, even to the extent of promising to abolish income tax.  Mischief may or may not favour him, however.  If Joe Biden becomes the presumptive loser in the election – through his age and signs of dementia – then Biden could pick up a sympathy vote and be seen as the underdog.  Voters may well just go along with their vote from the previous election expecting others to vote in favour of Trump. This would reduce Trump’s share of the vote.  Ironically, Trump might benefit if Biden stands aside, a new Democrat candidate receives the support of the biased media and Trump achieves underdog status.

Biden’s performance in the Presidential debate was embarassing for him and Trump’s reaction was, impressively, constrained.  How do you disarm the sympathy for a declining octagenarian? This will become a theme of the campaign if Biden continues.