The odds of a 50 basis point cut jumped from 15 percent on Wednesday to 59 percent Sunday evening.
A month ago I expected a 50 basis point cut by the Fed based on weakening data.
The data weakened alright, but following the the CPI report last Wednesday, I checked the odds at 15 percent.
Late Sunday, I decided to check the probabilities again and captured the above chart.
There was a huge rally in the odds on Thursday and Friday as noted by the Wall Street Journal in the chart below.
For and Against a Half-Point Cut
- WSJ Sep 15: Interest Rates Are Too High. The Fed Should Cut by a Half Point.
- WSJ Sep 13: Economic Data Argue Against Large Fed Rate Cut
Let’s recap recent data.
September 6: Payroll Report: Manufacturing Sheds 24,000 Jobs, Government Adds 24,000, Big Negative Revisions
September 9: Fed Beige Book Conditions Are Worse Now Than the Start of the Great Recession
The current economic headline conditions are worse than the conditions heading into the 7th month of the Great Recession.
However, the jobs report and the Beige Book were factored in to the rate cut odds ahead of the CPI report.
On September 11, I commented The Cost of Rent Up 0.4 Percent Again, CPI Rises 0.2 Percent in August
I expected rent and OER to moderate. They didn’t. The CPI rose 0.2 percent month-over-month but fell to 2.5 percent year-over-year.
Had shelter cooperated, the gain would have been much lower, which is what I expected.
However, rent and owners’ equivalent rent (OER) rose 0.4 percent and 0.5 percent respectively. OER is the price of rent someone who owns a home would pay if instead they rented their own home.
Other than shelter, this was a very tame report. But shelter is over a third of the index.
On September 12, I commented A Rate Cut Friendly Producer Price Index Report Follows the CPI Report
I called it rate cut friendly but an amusing headline on Investing.Com proclaimed US stocks choppy following hotter-than-expected PPI reading
The report was not hotter than expected. Factoring in revisions, it was weaker than expected, but not hugely so.
Import Prices Drop 0.3 Percent, Export Prices Plunge 0.7 Percent
On September 13, I commented Import Prices Drop 0.3 Percent, Export Prices Plunge 0.7 Percent
Economists did not see this one coming. The consensus for export prices was -0.1 percent. And there was a negative revision to export prices.
Since July, I expected the data to weaken enough for the Fed to cut 50 basis points.
Import-export prices and the PPI report might be enough. We find out on Wednesday.
Reflections on the Fed’s Dual Mandate
I do not believe there should be a dual mandate.
Heck, I don’t think there should be a Fed. Nor do I think a goal of 2 percent inflation is a good idea, even if accurately measured.
But I didn’t create the mandate, Congress did. And that mandate gives the Fed cover to do whatever it wants.
On September 14, I addressed the question Understanding the Fed’s Dual Mandate, Should the Fed Cut Rates?
The overwhelming answer by economists to the opening question is yes. Your mileage may vary.
Looking Ahead
Underlying inflation pressures are huge. Given neither party’s willingness to do anything to fix out of control spending, it’s the recent decline in the rate of inflation that’s transitory, not the increase in inflation.
It’s not a pretty picture no matter who wins.
But on Wednesday, the Fed can do whatever it wants and justify that on the basis of its dual mandate. If the Fed does cut by a half-point Republicans will scream.
if the FED was owned by the citizens, via the US treasury, it would be a HUGE improvement. 95% of folks don’t get the NYFED is a private company owned by the nyc bankers. might as well outsource the currency mouse clicking creation to facebook or raytheon. it is the greatest con job in amerika bar none. i’ll tip my hat to the NYFED building when i walk by it on friday, as i normally do. better than “the sting”.
Can you imagine the political fallout if the national rate-inflation-employment manipulators don’t try to juice the economy?
The most disgusting thing about this empty election cycle is the virtual absence of any conceptual attack on economic programming.
Hell, even Trump has a macromanagement scheme: no taxes on tips, no taxes on overtime, lotsa taxes on cheap imports. After a bad breakfast, today the king will tax marmalade.
And on the other side, pure fascism posing as welfare-state socialism.
Apologies for wandering further off topic (which is rate cuts), but what does this dunce (whom I’m going to have to vote for) imagine the consequences might be of declaring tip income untaxable? You’re out to dinner spending your after-tax money, mightn’t you reduce rather sharply the server’s tip? Then what? To make up servers’ lost income, do restaurants add a service charge? And since it goes to the servers, will that also be untaxable?
Here we jump past the reality that on cash transactions, a lot of tip income is already untaxable.
There’s very little evidence that Trump or his advisers if he has any who say anything but “Right, boss!” can think past their shoelaces on economic questions (or on many others). A couple-few decades ago I looked at his bonds for, it must have been Atlantic City, and thought no effin way.
Now I’ve got no real choice but to vote for an econ-putz whose paper I wouldn’t buy.
This political move won’t help Harris. Interest rates decreasing by .50 point isn’t going to help people buy a house or car. The price of houses and new cars are beyond reach for over 50% of the population. Those with assets and CD’s won’t like it. This will help Trump as the economy will get worse before the election.
“Republicans will scream” regardless…
they haven’t accepted the last election…
And they put all of their eggs into the same basket case.
It is the definition of insanity: doing the same thing & expecting different results.
No, it isn’t. Doing the same thing and hoping for different results is the mark of someone who understands there is far less regularity in nature than we imagine. You need a new cliche.
The Great Inflation was due to William McChesney Martin, Jr. changing from using a “net free” or “net borrowed” reserve position approach to the Federal Funds “Bracket Racket” c. 1965. Note: the Continental Illinois bank bailout provides a spectacular example of this practice.
The effect of tying open market policy to a fed funds bracket was to supply additional (& excessive) legal reserves to the banking system when loan demand increased.
If bank credit moderates, then dropping rates won’t refill the punch bowel.
Given the credit credit card, auto loan, write-offs, the extend and pretend of CRE by private equity providing bridge loans in anticipation of lower rates yet 40% write downs are prevalent how can the punch bowl be refilled?
Rhetorical question!!!
“…from 15 percent on Wednesday to 59 percent Sunday evening.”
Sounds skitzophrenic (sic). Place market bets accordingly.
There’s a disincentive to disclose the truth as knowing what’s going to happen portends profiting from the knowledge.
Hyper inflation is the preferred means to default on the national debt. What can’t be paid won’t be paid. Low interest rates are one means to achieve hyper inflation.
Compared to the SC the Fed seems to be doing a good job of being (relatively) apolitical. Mish – I am intrigued what you would replace the Fed with….maybe a piece on this in the future? I struggle to see how going back to total political control of monetary policy or total market forces is a sustainable model. Surely the libertarian model relies on market participants not being bad actors and so cannot work.
On a related theme I am intrigued whether inflation really is such a big risk given that all of this new printed money is largely going to the risk rather than pushing up asset prices. Maybe an article on that.
Interest rates are going to zero, but not quickly. Kamala has to win first before all the old voters lose their CD interest.
CD interest can be locked in for years. I have on CD locked in over 5% through 2030. There are instruments that can be bought with interest rates all over the place from 1% to whatever you want, you just need to be willing to pay.
We have laddered CD’s. Yes we have some locked in over 5% but as they mature the rates have continued to significantly decrease.
Well I bought 20 year treasury bonds locked at 4.5% and they are appreciating up nicely in value. There is a way to lock in whatever you want.
I recommended TLT here at $85 and it’s over $100 today and been paying 3% yield to boot. Might start selling OTM calls on it after the fed cut on Wednesday.
Again, it’s the 3 and 6 month T-Bills. But I guess bettors think they control the Markets. The 3 and 6 have been signaling for months it would be a half point, and that signal has not changed. The Fed follows the Market. It’s simple but true.
The “bettors” (bond traders) are the market. Bond prices aren’t being decided by some inherent market wisdom or fundamental analysis of the gargantuan debt and deficits. Traders are merely “front-running” the anticipated future rate cuts.
The rate is the “Market.” As I noted, the Fed had to keep up with the 3/6mo. T-Bill rate in order to comply with the Market. Anyone who could read a chart overlay of those rates with the Fed Funds rate could see that. The 10/30 year rates are mostly irrelevant. Maybe I was lucky this time? If you look at the charts the “luck” prevails 90% of the time, and if not lucky, the Fed catches up the next time. I’m no guru, I can just read charts.
Weren’t the ‘markets’ signaling for almost all of 2023 and 2024 ehe Fed was going to cut its Fed fund rate? The Fed did not cut during any of that time period. The “Fed follows the Market” theory is just silly. The market may try to bet – and front run – on what the Fed is going to do, but it’s obviously wrong on a regular basis.
Whether it will be 25 or 50 is anyone’s best guess.
That they are entering a rate cut cycle becomes the markets problem as to how far the cycle goes.
Fed still must remain apolitical or the knives will be coming out after election.
Data remains that inflation is not receding to where 2% as goal says it is to go.
Unemployment which is what Jackson Hole Powell stated has to be balanced against fighting inflation is not doing what it does in a recession. It is a softening in jobs market but not a strong breakdown that would overwhelm Bank reserves for losses prompting Fed intervention.
Market outcome dependent 25 Basis would be appropriate if this is data driven decision. If they do 50 then the signal is that all is not what data says it is. Also it would mean Banks are not as solvent as Stress tests proclaim.
Fed has been moving towards a return to a market based economy from Central control. That is the espoused historical role for Fed. To intervene when they are only ones left to be lender of last resort.
Powell goes for gradualism except when he panics so is there something he needs panic about? Not a good message to send if he does panic once again.
Powell’s panic? Trump
If it was Chair Dudley then tables would be tilted.
Powell however appears to want to leave as his legacy a return to normalcy.
All things he does aims at normalcy as the measure.
Even his after the fact panic attacks, guides towards some balance.
He has not come off to me as an ideologue. Granted that is within the framework of Keynesian economics which is the Feds own Culture.
Am still inclined that 50 basis would be the wrong message. Why goose inflation expectations?
“Fed has been moving towards a return to a market based economy from Central control.”
The Fed isn’t as wild and reckless as it was from 2008-2023, but it still carry’s a $7T balance sheet and the “Fed Put” is alive and well.
And a loft of damage has already been done (inflation, unaffordable housing, monster debt, extreme wealth disparity leading to extreme political disparity).
Am no fan of Fed. Still have to trade what they will do and what market believes what they will do. Have been consistently risk off in trade position and defensive.
USD/JPY short has been a good winner so far. Not all great trades EURO/CAD short was so choppy got out of it when it did not move as expected for a small gain. Am currently short EURO/USD as recession beckons in Europe and think ECB will cut faster and deeper then Fed.
Fed Put will get done but first Banks have to be running thru their reserves. It has been years in rebuilding reserves since GFC and Fed has signaled they believe via stress tests that Banks are sound. It would take a large event for them to start printing again. Nothing is happening now to trigger that Put to be resumed.
The Fed put generally means that the Fed will intervene to support the stock market from significant declines.
That intervention could take the form of interest-rate cuts, jawboning, lending, repo market operations, bailouts and printing.
Agree that nothing is happening now to cause more QE (printing) but interest rate cuts are very much in the picture with jawboning as required.
Not predicting future moves in equities but pointing out that the Fed shouldn’t be manipulating the market in such a manner.
Right now Mr. Market is VERY clear: The FED is going to cut rates by 50 basispoints. Mr. Market is also saying that after that the FED will cut rates another 100 basispoints in the near or distant future.
Yes, that’s what happens when you fail twice to assassinate our political opponent. The System has to work overtime to swing the election.
Have to keep the melt-up going. Powell wants to keep his job as well.
I had a 100% chance 2 weeks ago, and I will stick with it!!
What’s the vol of rate cut odds? Maybe there should be a futures contract and then options … But this time is different. We can cut rates AND have record highs in markets. AI told me so. Something to do with virtual. Although Mike Hartnett, a carbon based life form, did say a while back, sell the first cut. Hmmm.
The depression that inflation always causes is starting to move in fast.
one half of the misery index
So if we lived in a world with no fed and the free market set the rates, we’d have wild moving rates on a daily/weekly basis depending on what economic data came out?
If CPI is bad, rates rise. If jobs is bad, rates drop. If GDP is good, rates rise. I don’t see how this would be better for business or individuals over the fed. It would be impossible to plan a business cycle in this environment.
Just some thoughts.
If you didn’t have a FED, what would be the point of manipulating econ data? Vol would drop.
LOL so the price of oil moves daily, we get lots of oil, oil producers, oil consumers; corn, wheat, soybeans yet there are farmers producing massive amounts of the stuff as efficiently as possible. Markets develop to lay off the volatility via futures or insurance contracts and boom, we have commodities and consumers of commodities. Is it difficult being a farmer for this reason? Yes. Do we still have farms that have cycles that they manage to? Yes. Do you buy gas? Does it move often? Yes. But, and here’s the thing, the producers and consumers manage to it and we don’t have as many boom/busts in gluts and shortages like we do with manipulated money.
I would say the proof’s in the pudding. Look at all the chaos setting the price of money has created and will continue to create both here and abroad.
If setting prices by central planners worked then there would be many examples of its success across history.
Regardless of how you vote, do you think price controls on food proposed by one of the candidates has a remote chance of passage or success? So why is “money” treated differently?
Just some thoughts.
You are confusing apples with oranges. The reason oil, corn, wheat, soybeans, etc are produced in the first place is because a driller or farmer has a good idea what kind of price they may get after they harvest their product and stable interest rates.
An oil producer needs to borrow money to drill, its a capital intensive endeavor but they only borrow when they calculate based on the current interest rate when the returns will be based on the price of oil. The producer knows that oil price will fluctuate but then to have the interest rate fluctuate would make it an impossible forecasting activity.
Virtually all business decisions are driven by this formula.
WACC=(VE×Re)+(VD×Rd×(1−Tc))
Start changing all the variables and it breaks down.
Having commodities fluctuate AND banking interest rates fluctuate would create chaos. And don’t forget that farmers and oil producers are highly subsidized by the Fed government and that’s with fixed interest rates now!
As for food price controls, they already exist through the mentioned government subsidies farmers receive, the tariffs imposed on some foods and the SNAP/welfare cards and SS payments people receive. The “control” is literally in the trillions every year and people keep begging for more.
Getting caught up on political noise keeps you from seeing the “controls forest” from the “control trees.”
The money stock can never be properly managed by any attempt to control the cost of credit.
– So if we lived in a world with no fed and the free market set the rates, we’d have wild moving rates on a daily/weekly basis depending on what economic data came out?
> So we do live in a World with a Corrupt Fed (same as NO Fed, as it’s a Controlled Fed), and we do have moving, fluctuating, Data on a daily basis.
– If CPI is bad, rates rise.
> CPI is badly Manipulated, and consistently Revised, so don’t use it for anything.
– If jobs is bad, rates drop.
> Jobs are horrible, but has nothing to do with rates, and much, much more to do with Policy.
– If GDP is good, rates rise.
> Any excuse will do, which is why we will definitely see .50 now and more than likely again in late October IMO.
– Just some thoughts.
> Thank You!
Interest is the price of credit. The price of money is the reciprocal of the price level. 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.”
the FED setup now is akin to allowing Federal Express, a private enterprise, the monopoly power to be able to mouse click new currency at their whim. the FEDRESNY is a private enterprise.