U.S. stocks finished lower after the Federal Reserve voted to cut interest rates by 0.5 percentage point, opting for a more aggressive reduction than investors had been expecting just a week ago. . . .
U.S. stocks edged lower. The S&P 500, the Dow and the Nasdaq Composite rose after the Fed’s announcement, then pared those gains and turned negative. As of 4 p.m. ET, the Dow dropped 103 points, or 0.25%, while the Nasdaq Composite Index and S&P 500 retreated 0.3%. . . .
Many in the GOP, including Trump have mentioned that sort of thing as a possibility.
That would be a very serious accusation to make so I won’t make it, (but I won’t rule it out completely either.)
For now I’m gonna go with
“The economy is in worse shape than we have been led to believe. The big rate cut may or may not be the correct reaction, but it is a sign that the economy is not healthy.”:
In my finance days my office received a block of continuing education from a very senior Wall Street analyst. A portion of it included a round table of Fed actions and logic. This was about 23 years ago. The objective of avoiding the appearance of political favoritism in Fed decisions and timing of actions was a topic. I am not confident that the current rotating officials have the same ethical strength to avoid party favoritism.
Fair enough, but let’s not lose site of the fact that (rightly or wrongly) the Fed believes that when the economy weakens it should cut rates and/or expand its balance sheet.
Thus a bigger-than-usual rate cut might signal nothing more than “the economy is worse than has been portrayed and requires more drastic action.”
The Fed’s stated goal is mean PCE inflation at or below 2% in the long term.
Since PCE inflation spend so much time above 2% (and is still above 2%) to achieve its stated goal it will have to keep rates pretty high for pretty long.
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If it is already giving up the fight (putting it on hold) something must be amiss.
I believe the weakening job market and weakening credit market and K-shaped economy are only the tip of the iceberg.
I believe the Fed is soon approaching one of the biggest fights of its existence and is doing so at time when it is almost out of ammo.
Its action today definitely doesn’t support the narrative of a healthy economy. As a student of flawed human behavior, I always consider the potential for emotional influences on the actions of professional bodies. One could also think that this move indicates that the Fed held off too long in reacting to the economic data.
I believe the Fed has given-up (or delayed) the fight against inflation for economic reasons, but not merely because of the standard “GDP growth” or “job market” reasons.
There are two other closely-related problems (below the surface) in the economy. They are illustrated below.
These problems are so large, rational individuals, like those at the Fed, might be persuaded to focus on them now and focus on inflation later. Coolness in the labor market , corporate profits, GDP etc. only add to it.
1 The amount of money the Fed owes the US Treasury. (below the zero line indicates an IOU)
2 The long term health of the banking (and pension funds and insurance companies.) Their balance sheets tend to be heavily invested interest-paying instruments. Bank (only) balance sheets are illustrated below
Now that is ugly and very serious. The guys who print (add 00s to the spread sheet of account balances) the legal tender are behind on their owed payments to the Treasury. That means there is a negative balance in the payments they are receiving from member financial institutions, possibly in the form of institutions whose balances of defaulted loans are keeping them from making their required payments on overnight loans to the Fed. In a since enough borrowers are in default to enough banks, which has reached, or is about to reach a tipping point of Banks now in default to the Fed, who is now unable to make ontime payments to the treasury.
That much is definitely true and refers to the first chart.
You are probably aware of the following but for those who may not be:
The Fed makes money. Because previously it printed money and bought bonds, MBS etc… The Fed collects the interest on those bonds and MBS.
The Fed pays-out money as interest to banks when banks deposit overnight money with the Fed.
Normally, the two are in balance and any “profit” the Fed makes is returned to the Treasury.
But recently, for a couple of reasons (to fight inflation and to stabilize banks after SVB etc.) the Fed has raised the interest rate it pays out to banks so much that, for the first time ever, the Fed is taking some very serious “losses.”
For the moment, let’s forget about the job market, the GDP and all the “normal stuff.” The Fed has to cut the rates it pays to banks to stop taking these losses. Over time it will probably have to keep cutting rates in order to make a gain that will offset the loss it is currently taking. That is a lot of rate-cutting in the future . . . even if it leads to inflation.
It is bad policy to “try to maintain rates as low as possible until inflation becomes a problem.” Yet the Fed has been doing exactly that for decades.
It is bad policy to cut rates in response to every gust of wind and economic down turn. Yet the Fed ahs been doing that for decades.
It MIGHT be good policy to cut rates in response to the problems noted in the two scary-looking charts above . . . but given the Fed’s history, it is likely they will cut too much, too soon and for too long.
The fed is already artificially intervening and keeping mortgage rate artificially low.
Doing so has two (contradictory) effects
It keeps home prices artificially high, out of reach of young buyers, land low- middle-income families.
It makes it cheaper for the same to go deep into debt to buy homes that may or may be in a bubble.
But even to the degree it does #2 above, artificially low rates are just a form of price control doomed to fail in the long run. Like lowering rates so they can buy tulip bulbs or lowering rates so they can buy stocks on the margin in 1929 Kids can go deep into debt now to by over-priced homes . . . but those rates prove unsustainable the prices will stop rising and probably fall. (Kicking them in the balls on both ends of the housing transaction.)
