— Market’s tepid reaction to Friday’s good employment data frames the bearish narrative.— Beware! Fed rate cuts may not be as imminent as recent strong market action may be signaling.— I ask the question, is it about time we let good news be good news without Fed intervention?
Bah! Humbug! Bad News…
Economy’s too good … wages up 4% YOY … 3.7% unemployment … 2016 new jobs added in December (betting expectation) … productivity up … inflation edging back … Fed rate cuts on hold.“Rate Cuts in the Spring? The Jobs Numbers Aren’t Convincing.”This article and many others on the subject of ‘when and how much the Fed will cut rates’ are exemplary of prognosticators refusing to let ‘good news be good news’. Long before recent pronouncements by the Fed that it had turned more dovish the theme had been ‘the Fed won’t ease up or back off its hawkish stance until the economy had begun to show weakness’. Continued good jobs numbers, lower rates of inflation and a low unemployment rate fly in the face of this argument. According to the Barron’s article cited above “The stock market has predicted nine of the past five recessions, the late economist Paul Samuelson famously quipped.” The piece goes on to add that the futures market has been even worse recently about predicting Fed rate cuts pricing in six of the next three. If this rings true the punditry corps has been even less prescient predicting recessions and rate cuts or increases. As I’ve said more than once, the prediction business is wicked hard.
Fed rate cuts may not be imminent … So What?
Federal Reserve bank of the United States
Since May of 2023 when the Fed funds rate first popped above 5% the bears have been screaming that the Fed was going to kill the economy. What happened? There are two answers.The first has to do with liquidity. Although the Fed raised the price of of money substantially from its emergency lows, they never removed much of the assets they provided with Quantitative Easing (QE). Before the Great Recession (2009) the Fed balance sheet assets stood at about $900 billion. In the aftermath of the financial crisis and Covid 19 it peaked in May of 2022 at almost $9.0 trillion. Since the peak the Fed has only trimmed about $1.2 trillion from that number. Ergo, the banking system is still awash in liquidity. You just have to pay more for it these days, but it is available to borrow. The price right now is about 5.5% (Fed funds), which happens to be near the average Fed fund rate in the US for the past 50 years.The second major factor would be the $7 trillion in stimulus thrown into the economy by the $2 trillion unfunded tax cut of 2018 plus $5 trillion in Covid stimulus. These are huge numbers and they just don’t get spent once. They continue to circulate through the economy, bolstering it via the “multiplier effect.”One other point I might make is that there are a huge number of workers in lower end and service jobs, many of whom have seen their wages double (because of labor shortages) from $8, $9, $10 per hour. Every dollar of these increases will be and is being spent. The impact of this has to be huge.
Why does the Fed need to cut?
This may be heretical speech to you but I ask after 7 months of the economy doing just fine with a Fed funds rate above 5% and the 10-year US Treasury note yielding 4% (after being as high as 5%), why does the Fed need to do anything except quietly reduce the balance sheet? Wouldn’t it be wiser to save the rate cut for a real emergency and let risk-averse savers earn a return? Yes, the interest on our $32 Trillion debt is problematic. As of October the total annual interest on our debt was running at about 3% ($1 trillion annually–about 3.7% of 2023 GDP). This is not good, but it will not be the end of the world if the Fed does not move to cut in the next three months. Plus, we have seen rates on long treasury debt decline significantly without action on Fed funds. Also, this is not the main point of the current bear argument. It is all about the market cracking if the Fed does not move quickly to do three or four cuts.
Bottom Line
Why can’t we just let good news be good news? The market and economy have been doing just great with a FF rate north of 5%. I don’t think we should be too distraught if rate cuts don’t come on the most optimistic time frames. It will be because the Economy is stronger than expected. If it ain’t broke, let’s not try to fix it prematurely.What’s your take?More By This Author:The Newest Bogus Narrative: The Bulls Are Back. They May Not Like the Reasons Why the Fed Is Easing.
Is The Market’s Recent Strength All About Expected Rate Cuts Or Is Something Else At Play?
Powell Speaks – The Market Cringes – Then Moves On – You Should Too
