There is still a 78.6 percent chance of at least a quarter-point cut in June.
This morning I wrote Hot PCE Inflation Data and Weak Spending Sure to Give the Fed Headaches
There is no good news on inflation or spending in recent data.
And yields on long-term bonds surged. The yield on the 10-year note jumped 11 basis points to 4.25 percent. The yield on the 30-year bond jumped 9 basis points to 4.63 percent.
But the Fed has penciled in two rate cuts this years with the market closer to three, and the market did not change its view.
Unfortunately, I failed to capture the above chart yesterday to see the precise change. But I did capture charts on March 23.
Target Rate Probabilities for 2025-06-18 as of 2025-03-23
Six days ago the market saw a 77.9 percent chance of at least one rate cut in June. Now, despite hot inflation, the odds only dropped to 78.6 percent.
Six days ago, the odds of a rate cut for May were 14.3 percent. The odds have actually increased to 18.5 percent.
How to Make Sense of This
If the Fed does cut in June for no reason other than it has penciled one in (this is certainly possible), I would expect long-term yields to rise, and they did.
The other possibility is the market expects a recession sooner rather than later. As for the long bond in this recession scenario, it makes perfect sense for worries over long-term budget deficits.
What to Expect
If the Fed wants to push back on the rate cut idea it will start yapping that way.
If the Fed wants to go along with the “everything is under control” meme, then it will make excuses to cut.
If there is no general consensus, then yapping may be all over the place. In that case, pay attention to Fed Chair Jerome Powell and New York Fed President John Williams and ignore the rest.
Forward Guidance
By the time we get to the June meeting, the Fed will have yapped the market to what it wants to do.
The nonsensical process where yapping matters more than data, we call “Forward Guidance”.
And best of all [sarcasm] the banks get to front-run the yapping.
Is Market Driving Rate Cuts?
No, not really. The Fed jawbones the market with nonsense about inflation expectations, dot plots, and forward guidance.
The market tends to front-run Fed jawboning.
But when the market gets too far in front or behind what the Fed wants to do, a parade of Fed governors starts yapping, generally in-line with what the Fed Chair wants to do.
I have discussed this many times before but let’s do a quick recap.
The Fed Uncertainty Principle
Please consider The Fed Uncertainty Principle written April 3, 2008 before the collapse of Lehman Brothers and Bear Stearns.
Does the Fed Follows the Market?
Most think the Fed follows market expectations.
However, this creates what would appear at first glance to be a major paradox: If the Fed is simply following market expectations, can the Fed be to blame for the consequences? More pointedly, why isn’t the market to blame if the Fed is simply following market expectations?
This is a very interesting theoretical question. While it’s true the Fed typically only does what is expected, those expectations become distorted over time by observations of Fed actions.
If market participants expect the Fed to cut rates when economic stress occurs, they will take positions based on those expectations. These expectation cycles can be self-reinforcing.
The Observer Affects The Observed
The Fed, in conjunction with all the players watching the Fed, distorts the economic picture. I liken this to Heisenberg’s Uncertainty Principle where observation of a subatomic particle changes the ability to measure it accurately.
The Fed, by its very existence, alters the economic horizon. Compounding the problem are all the eyes on the Fed attempting to game the system.
A good example of this is the 1% Fed Funds Rate in 2003-2004. It is highly doubtful the market on its own accord would have reduced interest rates to 1% or held them there for long if it did.
What happened in 2002-2004 was an observer/participant feedback loop that continued even after the recession had ended. The Fed held rates rates too low too long. This spawned the biggest housing bubble in history. The Greenspan Fed compounded the problem by endorsing derivatives and ARMs at the worst possible moment.
In a free market it would be highly unlikely to get a yield curve that is as steep as the one in 2003 or as steep as it was just weeks ago when short term treasuries traded down to .21%.
The Fed has so distorted the economic picture by its very existence that it is fatally flawed logic to suggest the Fed is simply following the market therefore the market is to blame. There would not be a Fed in a free market, and by implication there would be no observer/participant feedback loop.
Fed Uncertainty Principle: The fed, by its very existence, has completely distorted the market via self-reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed’s actions. There would not be a Fed in a free market, and by implication, there would not be observer/participant feedback loops either.
Corollary Number One: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn’t know (much more than it wants to admit), particularly in times of economic stress.
Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
Corollary Number Three: Don’t expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.
Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.
The Fed Uncertainty Principle is still my all-time favorite post.
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March 28, 2025: GDPNow Nowcast Takes a Steep Dive Into Negative Territory, What Happened?
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If your base case is stagflation, then this post, including the above links makes a nice case.
I am not convinced of that outcome, however.
No one really knows what Trump will do or the ultimate impact of a huge wave of tariffs if he goes ahead.
My base case is a slowing economy and recession. Enough to override the inflationary impacts of tariffs? I think so, but remain unconvinced.
We are around TWO 85 year-olds here (we are visiting). BOTH of them began cutting expenses. BOTH of them own their houses. BOTH of them had been saying NOTHING about the Inflation pressures being felt. BOTH voted for Trump and celebrate him daily.
The expenses that they are both cutting are INSURANCE rates (good luck – – this is Cal). One of them is tweaking expenses such as cutting the Alarm system expenses and the other is making noise about Home Insurance.
When I started hearing this, from two people who are BOTH widowed and REALLY bad with money, I am now convinced that the inflation factor FEAR is real and growing.
Tensions will rise. People COULD revolt on inflation alone.
Would these Octo’s still vote for Trump?
Absolutely. He can do no wrong.
The biggest issue with Trump, in my mind, is the uncertainty which may do him in. The markets want a fair measure of certainty to function well.
Things are confusing and they may well lose control of their narratives. I welcome it as the King must be seen as Naked. WILL A CHILD call him out?
I dunno.
No matter what happens, Trump will be blamed, right?
Speaking of Bad Fed Greenspan was the worst of our lives. He delighted in gobblygook ambiguous statements that was THE most opaque of any Fed ever. And he blew the Monster tech bubble. And for years claimed the Fed couldn’t tell until years later if they had.
WE ALL KNEW THE FED BLEW THE TEH BUBBLE. ( Yes JP et al blew the more recent RE bubble.)
Frankly I believe we’ve been on a 50 yrs massive secular rate decline bouncing near zero, and negative real rates. (To me the reason gold has been getting more sustainably perking
Ok, you can toss in maxing credit issues too.) To me a cycle awaiting a new secular paradigm.
May I add Bernanke was awarded a Noble Prize in economics. And to me, that experiment has not even been completed and should not have been recognized in the first place. Once all the Fed balance sheet has been cleaned we’ll talk about it. The supposed sterilization of QE is not so easy it turns out.
Yes, Greenspan was very bad. He solely caused Black Monday and the Dot.com boom/bust.
Greenspan had only been Fed Chairman for a couple of months before Black Monday.
Groke bought X.
Jet fuel is the largest cost for airlines. If u cut it in mid air the pilot can glide the airplane and land safely. Trump will cut gov spending and JP will cut rates. The debt ceiling negotiation need time and skills. The starting point is $4T, but the dems and the reps will settle for far less to maintain stability. The gov might save a portion of it, cut debt while increasing the GDP. That’s what people do after getting a raise or a tax refund. The ratio: Debt/GDP might decay slowly, before dropping sharply. The ratio Price/Rent might decay slowly before dropping sharply.
I think the government is in a corner. By the actions and body language, the US will be at wars ever escalating. If the performance seen in Yemen is the quality of war proposed, we are in deep trouble.
Should have let recession reset occur. Now stagflation or worse.
Recent price action in Gold would tend to confirm that a rate cut is coming in June. The Fed (and all the other G7 Central banks) is trapped and their “price stability” mandate has gone out the window.
Got Gold?
By the way this isn’t about the economy as much as it is the changing of the system of government. Trump told automakers he would punish them if they raised prices. He doesn’t care about profits for wall street. People who are thinking this is some normal recession/recovery or think that tariffs are temporary are wholly out of touch with reality. I’ve said before this time will take about 8 more years for America to come through. It will take that long for all the damage to be done and undone. Trump is attempting to remake America and even people that voted for him don’t quite believe it.
What, then, about the assurances of prices falling, etc., starting on “day one”? He either meant it or didn’t. Now it seems like we are on the Long March to — who knows, really? It is a sheer experiment. There is no precedent. But there is all this incredible other noise in the channel — trying to very rapidly manipulate the culture, government branches, etc. Then all the reversals on policies — tariffs, etc. I’m just trying to sort what the focus, the project, really is. Seems like so much smoke and mirrors stirred in, every news cycle.
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“However, this creates what would appear at first glance to be a major paradox: If the Fed is simply following market expectations, can the Fed be to blame for the consequences? More pointedly, why isn’t the market to blame if the Fed is simply following market expectations?”
The Fed follows market expectations and can be blamed for allowing / contributing to leverage / amplification. Investors are Dorothy and the FED is the highly esteemed Wizard of Oz. Investors are afraid to pull back the curtain to learn the truth that they held the power all along. Investors won’t blame themselves for their own bad choices. Fund managers would be ending their careers if they blamed themselves.
I think at some point Trump will attempt to dissolve the Fed and set interest rates himself. This is going to effectively be the end of America as we know it.. Trump is effective in ignoring the other branches of government. There is a bill in congress that allows the executive branch to effectively take over all congressional authority. If this somehow passes, it will be the end of the Representative Republic as we know it. We are effectively going through our “Revenge of the Sith” moment with the emperor being Trump. I don’t expect there will be an actual election in 2026. Privately some Republicans are fuming but there’s nothing they can do about it. Expect more chaos by the week.
i suspect some states will start issuing their own currency like the good ole days. all empires crumble. we have 50 states that will function fine.
The Federal Government can not even bear a 4% Treasury interest rate. Debt servicing will destroy the Federal ledger.
This FIAT game has went on for 54 years and a 0% Treasury yield, for all durations, is the only way to prolong the Fiat game.
Eventually the FED, of course, will ultimately be the largest (possibly only) holder of US Treasuries.
The end is near for the post 1971 FIAT fun and games.
Who cares what the FED does. Their time is short.
I guess you don’t care unless you handle the currency every day for every vital activity. Or hold assets sensitive to interest rates. Then maybe?
So the fed put is firmly placed in the minds of investors/traders/speculators?
So that the recession that we are not in will never happen as unicorns and fairy dust sparkle in the never ending sunlight. Also so that leverage remains levered and we inflate away and monetize the debt.
The FED should cut short-term interest rates as soon as possible. But at the same time, they should have continued with, even increased, existing QT.
Interest is the price of credit. The price of money is the reciprocal of the price level.
The effect is to drive the banks out of the savings business, which doesn’t reduce the size of the payment’s system. The effect is to activate bank-held deposits.
The commercial banks are credit creators. The non-banks are credit transmitters. Lending/investing by the DFIs expands both the volume and the velocity of new money. Lending by the NBFIs increases the turnover of existing deposits (a transfer of ownership), within the commercial banking system.
The FED’s correct response to stagflation is the 1966 Interest Rate Adjustment Act.
Waller, Williams, and Logan seem to agree. They “believe the Fed can keep unloading bonds even when officials cut interest rates at some future date.”
That’s called targeting N-gDp as Scott Sumner advises.
-2 ?? Yes, you would have flunked Pritchard’s Money and Banking class.
As Jacob Viner said: “You don’t belong in this class”
1966 Interest Rate Adjustment Act II | Seeking Alpha
let’s also remember the NYFED has the real power and her owners are public knowledge and the nyc banks. might as well let federal express or amazon be able to manufacture the currency…….it’s all a scam. let the treasury do the job. the creature of jekyll island is a wonderful scam. i’ll tip my hat as i pass the NYFED next week.
Drawing on extensive research about polarization and partisanship, Talisse argues that certain core democratic capacities can be cultivated only at a distance from the political fray. If we are to meet the responsibilities of democratic citizenship, we must occasionally step away from our allies and opponents alike. We can perform this self-work only in secluded settings where we can engage in civic reflection that is not prepackaged in the idiom of our political divides, allowing us to contemplate political circumstances that are not our own. https://global.oup.com/academic/product/civic-solitude-9780197752166?cc=us&lang=en&
I don’t understand their dilemma. If they need to lower rates because the govt needs to refinance about 8 trillion of upcoming debt all they will do is to use “better ” inflation measures.
I guess trust in government could still fall a little more…
Most of us have our own ‘inflation measures’ and by mine, there is no room for inflation additional to what has already been endured. The people are inflation weary now, slipping more in will be noticed.
I think the proud and optimistic, if not triumphal, words will trail off, if prices lurch upward to any substantial degree. I don’t think there is a lot of patience left out there.
Did you see where Trump says he wants car prices to go up?
But the real inflation will be when he goes to war in Iran for Netanyahu.