We’re in the worst of all world for John Q Public. If he wants to invest money with a reasonable assurance of getting it back he has to accept brutally low US Treasury yields. 2-year notes traded in the 1.60s when last we looked. Need to borrow? If you can get credit you’re lucky to get a mortgage 200 bp over the 10-year note yield, a historically wide spread.
Would a Fed rate cut have a dramatic impact on this dynamic? Not really, but it is the most widely understood tool that the Fed has at its disposal at a time when the public is concerned about their savings, their insurance policy and their jobs. That’s why I think they will use their blunt instrument as they have so often in the past. Expect screaming of bailouts for Wall Street but not Main Street if they don’t.
No move would be a short-term plus for the dollar on an interest rate differential basis but expect the impact to be very short-lived. A cut would likely have little lasting impact unless it was greater than 50 bp, in my view.
