Fed hits markets with aggressive rate cut amid strong economy and pre-election pressure
Well, there you have it…..JJ gets up to the podium, spends 10 mins telling us how strong the economy is and how inflation is coming down, how the job market remains solid and how he does not expect us to go into a recession and why we have nothing to worry about and then he hits us with a 50 bps reduction in rates to stimulate the already strong economy….. I mean he said “The economy is strong” – those are his words, it is so strong that it needs a ‘crisis level’ rate cut just 6 weeks ahead of the most contentious, chaotic presidential election we have ever seen.
I think he caved, I think they put the pressure on him, I mean 2 weeks ago it was all about 3 – 25 bps rate cuts this year, it was all about slow and steady, it was all about not ‘rocking the boat’ and then suddenly last week it all changed.
They (the FED) went into blackout mode on the 9th and then leaked the idea to test the market……Nicky T released the first article in the WSJ on the 12th – questioning the logic of a small 25 bps cut vs. a bigger 50 bps cut and how 50 would be seen as taking control and not one of panic. Then on Monday the 16th, we had the big banks all come out and say that 25 or 50 is irrelevant….that it will be about what the future data says…and then on Tuesday the 17th – Greg Ip again of the WSJ wrote a piece basically saying that it needed to be 50 bps – and so there you have it. The FED getting pressure from the current administration, getting pressure from congress (Lizzy Warren leading the pack) and from the street over the past month – caved….and leaked the move to the media to prepare the markets…..And so anyone that was really surprised by this must have been sleeping under a rock…And while I had been pushing for a 25 bps cut – I acknowledged that 50 was the plan in yesterday morning’s note.
“In any event – while I still think he should only cut by 25 bps – my 42 years of experience tells me to listen to what the market is demanding and what the FED has leaked to the WSJ…...and that is 50 bps... so again, anything less will be met with big disappointment.”
So now its done and we can expect all kinds of ongoing analysis and arguments both for and against the move – but it is what it is….Time to move on….now the focus will turn to November….They will try to discern what the November & December cuts are going to be based on what JJ said yesterday…..The FED dot plot has 50 bps more penciled in for this year……so 25 and 25 would make sense….but I guess we have to see what the data tells us in the weeks just ahead of the election… In the end – JJ made it very clear that he has shifted his focus from inflation to supporting the labor market and thus the broader economy.
And just to be clear – the street is betting on 70 more bps worth of cuts by year end…. which means if we get that – the FED will have cut by 120 bps in an economy that is already strong…. Makes perfect sense, no? 120 bps would get the fed funds rate down to 4%.... Capisce? Good for mortgages (they have already come in and will come in a bit more on the idea of ongoing cuts) and maybe good for auto loans (maybe) – and that’s great – how many houses and autos are you buying next week? And if you think homeowners with 2.75% or 3% mortgages are going to run out and sell their current home to buy a bigger, more expensive one at a 6% rate – you need your head examined….The only ones that would be doing that are people that are being relocated and have no choice. Homeowners with 3% mortgages are not ‘moving on up to the eastside’ to take on a 6% mortgage unless they are forced to. Now by this time next year – analysts are suggesting we could see 5% – 5.25% mortgages….and that would be significant enough for those with 6% and 7% mortgages to refinance.
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