Why the Fed Will Not Give Trump's 3% Rate Cut

The White House’s reach on monetary policy is a risk for stock markets. Yet investors continued to ignore both the President’s call for 300 basis point rate cuts and the removal of Fed Chair Powell.Last week, on July 9, Trump wanted the Fed to cut rates by “at least” three percent. That would bring the Fed Funds rate from 4.25%-4.50% down to 1.25%-1.50%. Since the Fed is an independent entity from the White House, stock markets are not pricing in a rate cut of that size. Inflation is still 50-100 basis points above the 2.0% target rate. The job market is still tight, while unemployment rates are low.Since April 3, tariffs have continued to add significant uncertainty to global trade. Large firms may pass most of the tariffs on to customers, while suppliers absorb the remainder. Walmart (WMT) and Costco (COST) are in a trading range in response. Shareholders are willing to pay the 40x P/E on WMT stock and the 55x P/E for COST stock.Small-cap firms cannot easily pass tariffs to customers. This suggests that the Russell 2000 (IWM) is at risk of a correction.U.S. DebtThe U.S. has around $40 trillion in debt. After the “beautiful” tax bill, deficits will rise. That pressures U.S. bond prices, increasing the attractiveness of holding the S&P 500 (SPY) index ETF instead.