CME Fedwatch notes a huge jump in the odds of a 50 basis point cut by the Fed on July 31.
This is an edited post. In the hour or so that it took me to write this, the odds jumped from 49% to 71%.
Increasing Odds of 50 BPs Cut
- Today (one hour ago) 49.3%
- Now (2:48 PM central) 71.0%
- Yesterday: 34.3%
- 1 Week ago: 19.9%
- 1 Month Ago: 17.9%
Why?
- The odds jumped yesterday from the prior week on news Housing Slowly Rolling Over: June Permits Down 6.1%, Starts Down 0.9%
- The odds jumped today from yesterday on news Leading Economic Indicators (LEI) Unexpectedly Dive Into Negative Territory
What’s Really Happening?
- Traders are front-running the Fed.
- History shows the Fed is highly likely to cooperate with what traders want.
That’s it in a nutshell.
Four Easy Predictions
- Powell gets his name in lights
- Trump will praise the rate cuts while saying they may be too late. And if so, the Fed is to blame. Trump will have his scapegoat: Fed chair Jerome Powell.
- The market will not like a 25 basis point cut.
- The market will not like a 50 basis point cut either, although the initial reaction may be positive. Look for a gap and crap, if not immediately, within a couple days, but I expect the same day.
What About the Insurance Theory?
A number of Fed governors and economic writers want a big cuts for insurance purposes.
These people are economic illiterates.
Too Late for Insurance
Rate cuts now as economic insurance is like trying to buy insurance on your car after you wrecked it.
The bubbles have been blown.
Rate cuts cannot unblow economic bubbles any more than they can unblow a horn.
Rate Cuts Don’t Matter
The bottom line at this point is an economic recession is baked in the cake. The global economy is slowing and the US will not be immune.
It’s possible the US is in recession already, but consumer spending does not point that way, unless it’s revised.
It’s all moot.
Fed Deflation Boogeyman
The Fed has been fighting the deflation boogeyman.
Yet, the BIS did a historical study and found routine deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
Deflationary Bust Baked in the Cake
In the Fed’s foolish attempt to stave off consumer price deflation, the Fed sowed the seeds of a very destructive set of asset bubbles in junk bonds, housing, and the stock market.
The widely discussed “everything bubble” is, in reality, a corporate junk bond bubble on steroids sponsored by the Fed.
For discussion, please see Junk Bond Bubble in Pictures: Deflation Up Next
A 50 or even 100 basis point cut won’t matter now.
It’s too late to matter. The debt deflation horn has already sounded.
Mike “Mish” Shedlock
It’s the latter. The next crisis will be the last crisis before reset.
“Wuh? Deflation isn’t so bad? What? Inflation is the basis for the entire financial system…what is the BIS smoking? Even the FED has to avoid deflation because the system can’t run backwards”
Read the article. Based on analysis of deflation periods.
It’s obvious you didn’t
Shedlock has written a perfect article. I agree 100%. Well done.
Let’s see jobless claims still in the 210s with continuing claims falling, white hot consumer spending based on weekly chain store reports, hotels and flights anywhere are booked solid, vehicle sales of CUVs and SUVs are white hot with dealers selling out at full sticker MSRP + OPTIONS + FEES + TAXES…,
Where exactly is there a recession???
The media and economists downplaying the booming economy. It would be reported totally different if Bill Clinton’s wife was president today
The answer is white hot debt. The consumer is borrowing money to fund these ventures you speak of. Consumer debt is at record levels. Companies are drowning in junk bond debt. Medicaid and Medicare are nearing bankruptcy. The Federal Government is running record budget deficits as well as trade deficits. Job creation is largely based on guesses. And lastly the damn stock market is overvalued to the point of insanity. Banks have loaned money that will never be repaid. Look at the mess Deutsche Bank is in today and many more problem banks to follow. Donald Trump didn’t create these awful economic problems but his budget deficits are not helping to solve them either. Come to think of it his trade policies aren’t working out to well either.
Interest rates this low while the stock markets are this high indicates the market is polarized and unstable.
It is glaringly obvious that all the Western Central banks are now trapped in a “race-to-the-bottom” of interest rates and currency values.
Prepare yourselves accordingly.
This isn’t about bubbles or the economy. It is about rolling over debt. We need low rates to roll over debt. So do other countries. It isn’t a coincidence the 50bps cut may happen the same day there is a debt deal between Treasury and the Congress to increase the debt ceiling.
We have a lot of confidence in the Fed in our household. That’s why we have allocated 50% of our discretionary income into gold and silver. We’ve done that a few times before, but this time it’s different… we are taking delivery this time.
Fed goal has nothing to do with deflating bubble. That would cause increase in bancrupty and unemployment which they don’t want. I think they hold out hope that decrease will stimulate economy through further debt, which is mafestly nuts.
Why would a rate cut deflate a bubble?
It won’t It’s irrelevant
“Gold, bitchezzzz!”
“Rate cuts cannot unblow economic bubbles any more than they can unblow a horn”
Why would a rate cut deflate a bubble? Rate increases might deflate a bubble but a cut would be intended to keep the bubble afloat.
Fed goes “Lovey Dovey”!