I’m calling this my Judy Shelton Pick. I’ll explain what that means in a moment.
Despite the challenging words from Fed chair Jerome Powell pledging that that he will serve his full term, I think it’s likely that the Trump White House sees the continued shift of the Federal Reserve from raising interest rates to neutral to a bias toward interest rate cuts in 2019 as a sign that the Federal Reserve is yielding to political pressure from President Donald Trump. My observation of this administration leads me to conclude that when Trump thinks he sees a weakness in his opponent, he ramps up the pressure. Winning re-election in 2020 depends to a large extent on the health of the U.S. economy, which increases the President’s motivation to press the Federal Reserve to cut interest rates in 2019.
The Fed’s signal on June 19 that it has moved toward two rate cuts in 2019 isn’t likely to lead the White House to back off. This is where Judy Shelton comes in. Shelton is the the newest name to be floated as a candidate to fill one of the two openings on the Fed after the failure of Trump’s first two picks Herman Cain and Stephen Moore. Cain and Moore were so unqualified for a post at the Fed that even Republicans in the Senate moved into opposition to the nominations.
Shelton was an economic advisor to the 2016 Trump campaign with has aa PhD in business administration from the University of Utah. What she shares with Cain and Moore, however, is a very vocal belief that current interest rates are too high, as President Trump has repeatedly said. She told the Washington Post this week that she would like to see the Fed cut rates steeply–possibly to zero.“I would lower rates as fast, as efficiently, as expeditiously as possible,” Shelton told the Post. “The goal is still job creation even though it’s low employment,” she said, adding that she supports Trump’s economic agenda of lower taxes, less regulation and a battle with China over trade. In other words, don’t expect the Trump administration’s pressure on the Fed to lower interest rates to abate anytime soon.
Which is why I’m adding a second Treasury ETF to my portfolios to go with the Vanguard Intermediate Term Treasury ETF (VGIT) that I added recently to the Jubak Picks, Dividend, and Volatility Portfolios. Short-term Treasury prices and yields react with more sensitivity to reductions in the Fed’s benchmark interest rate than do longer-term Treasuries so this ETF has a chance to show more gains than its longer dated peers if the Fed moves to a third interest rate cut. The yield isn’t significantly lower than for the Vanguard Intermediate Term ETF–at 2.02% and the expense ratio is a low 0.07%. The ETF was up 1.91% year to date as of June 19. I’m not looking for a big gain here but 5% or so on price strikes me as probable. With a 2% yield that would bring the total return–the very unrisky total return–to 7% My target price for this ETF is $64. It closed at $60.92 on June 20.