Stand-Pat Fed May Get ‘Punch to the Mouth,’ Warns Top Analyst

Evoking Mike Tyson, Jim Bianco says a market dive could bring big pressure to more rate cuts.

The Federal Reserve may get a “punch to the mouth” if the stock market goes south next year, and the central bank is forced to lower interest rates more than it bargained for.

That’s the warning from noted analyst Jim Bianco, who cites boxer Mike Tyson’s famous dictum: “Everybody has a plan until they get punched in the mouth.” Such a painful, unexpected turn of events could really shake up Fed Chairman Jerome Powell and his intention to stay put regarding any more rate cuts—unless something drastic happens, that is.

Powell has long derided the notion that the Fed pays attention to the stock market’s gyrations. But there’s no denying that the market and the Fed have some kind of symbiosis: The market has risen handily this fall in tune with the Fed’s recent decision to deliver three sequential quarter-point rate reductions. Back when Powell was raising rates, he took a lot of flak from market types who blamed him for stock downdrafts.

Few expect the Fed to move anytime soon. According to CME Group, betting on the Fed’s lowering its current short-term rate target range (1.5% to 1.75%) is practically nil for Wednesday’s meeting and for much of 2020. A year from now, the odds for another quarter-point drop are about even with doing nothing.

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“We’ll have to see if this will hold up on a 5% to 7% correction,” Bianco, president of Bianco Research, told CNBC, referring to the Fed’s desire to reduce no further.

The slowdown in the global economy and in US manufacturing are factors that could push stocks lower in 2020, Bianco said.  “One of the reasons I believe that they’re on hold is the market is rocketing off to new all-time highs almost every other day. There is some concern about a bubble forming within the halls of the Federal Reserve.”

Should the market falter amid shaky economic numbers, he added, “I think the pressure would be on them to cut rates some more.”

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