Energetic backpedal from the aggressive monster-rate-cut trajectory envisioned by the markets three months ago.
By Wolf Richter for WOLF STREET.
The FOMC voted today to cut the Fed’s five policy rates by 25 basis points, with 1 participant dissenting, (Cleveland Fed president Beth Hammack who preferred no cut).
And participants see only two cuts in 2025, after economic growth, labor market growth, consumer income and spending, the acceleration of inflation, and big up-revisions of the data this fall have changed the scenario from that infamous soft landing to cruising at a fairly high altitude at an above average speed.
The FOMC also lowered by an additional 5 basis points the offering rate of its Overnight Reverse Repos (ON RRPs), which takes the offering rate to the bottom of the range of its rates (4.25%). The minutes of its last meeting disclosed discussions to that effect. We’ll mull this over in a separate article later, but briefly:
This adjustment will encourage money market funds that use ON RRPs to find other places for their cash, such as the repo market, which would ultimately drain ON RRPs faster to near-zero and shift liquidity to reserves, so that the Fed can continue QT for longer before reserves drop to the “ample” level at which the Fed has said it would end QT.
The 25-basis-point cut reduced the Fed’s five policy rates to:
- Target range for the federal funds rate to 4.25% – 4.50%.
- Interest it pays the banks on reserves: 4.40%.
- Interest it pays on overnight Reverse Repos (ON RRPs): 4.25%
- Interest it charges on overnight Repos: 4.50%.
- Primary credit rate: 4.50% (banks’ costs of borrowing at the “Discount Window”).
QT continues at the pace announced in May. The Fed has already shed $2.1 trillion in assets since it started QT in July 2022. According to the FOMC’s Implementation Notes today, the Fed will continue to shed Treasury securities and MBS under the current caps.
The “dot plot.”
Today’s meeting was one of the four times per year when the FOMC releases its “Summary of Economic Projections” (SEP), which includes the “dot plots.” The prior SEP came out with the monster-cut meeting in September.
For the SEP, each of the 19 participants jots down where they see the Fed’s policy rates, unemployment rates, GDP growth, and PCE inflation by the end of the current year and by the end of each of the next several years. The median value of these projections becomes the headline “median projection” for that metric. These projections are neither a decision nor a commitment by the Fed. Members change their projections as the economic situation changes.
Interest rates: only 2 cuts in 2025. Today’s cut reduced the midpoint of the target range for the federal funds rate to 4.375%.
Today’s median projection for the end of 2025 rose by 50 basis points from three months ago, to 3.875%, so only 2 cuts of 25 basis points each in 2025, compared to the 4 cuts they had envision for 2025 in the September SEP, reflecting the Fed’s backpedal from the aggressive monster-rate-cut trajectory envisioned and hoped-for by the markets three months ago.
Projections by the 19 FOMC members for the midpoints of the federal funds rate by the end of 2025 (bold = median):
1 sees 4.375%: No cuts
3 see 4.125%: 1 cut of 25 basis points
10 see 3.875%: 2 cuts of 25 basis points
3 see 3.625%: 3 cuts of 25 basis points
1 sees 3.375%: 4 cuts of 25 basis points
1 sees 3.125%: 5 cuts of 25 basis points.
The “longer-run” federal funds rate keeps rising. The median projection for the “longer-run” federal funds rate beyond 2027 rose to 3.0%, up from 2.9% at the September meeting, up from 2.8% at the June meeting, and up from 2.6% at the March meeting.
At the same time, it sees PCE inflation at 2.0% beyond 2027. In other words, over the longer term, it sees its interest rates to be 1 percentage point higher than PCE inflation.
GDP growth: The median projection for real GDP growth for 2024 rose to 2.5% (from 2.0% in the September SEP). For 2025, the GDP growth projection rose to 2.1% (from 2.0%), and 2026 remained at 2.0% (which is the 15-year average real GDP growth of the US).
Unemployment rate: The median projection for the unemployment rate declined to 4.2% by the end of 2024 (from 4.4%). For 2025, the median projection declined to 4.3% (from 4.4%).
Inflation rate: The median projection for “core PCE” inflation by the end of 2024 rose to 2.8% (from 2.6%). For the end of 2025, it rose to 2.5% (from 2.2%).
Overall PCE inflation is seen rising to 2.5% in 2025, higher than it is now (2.3% in October). No 2.0% in sight until 2027.
What changed in the FOMC’s statement:
The statement changed in only in two ways in the third paragraph, and the rest was unchanged.
Replaced the old rate with the new rate: “…to 4-1/4 to 4-1/2 percent.”
New: “In considering the extent and timing of additional adjustments to the target range for the federal funds rate,” which replaced the old: “In considering additional adjustments to the target range for the federal funds rate…”
The whole statement:
Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Voting against the action was Beth M. Hammack, who preferred to maintain the target range for the federal funds rate at 4-1/2 to 4-3/4 percent.
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I would love to have been wrong, but as I said a few days ago:
“I have faith in the FOMC to take a hard, clear-eyed look at the data in front of them–reaccelerating consumer goods inflation, stubbornly high consumer services inflation, massive upward PPI revisions, a much tighter labor market than apparent a few months ago, a screaming AI and crypto bubble–and, after soberly analyzing it, do the wrong thing.”
At least there was a single dissent, unlike last meeting.
This was a hawkish move: seeing only 2 cuts next year (instead of 4), seeing higher inflation and higher longer-run rates.
S&P 500 down 1.1% at the moment.
Wolf, I shorted Tesla today at $473. It got as high as $488. Used double-short etf TSDD.
Yes, they have levereged ETFs for single stocks now. I’m using one for Nvidia – double-short NVD.
Now we wait.
Never understood the point of single stock ETFs. Why not just buy puts?
Impeccable timing!
@ShortTLT – slightly different animals – high implied vol would make puts on Tesla very expensive and your timing has to be good. Given Andy’s timing however…
gotta call stupid
if you reduce fed funds rate and mortgage rate/treasuries rates rise
then bond vigalantes are no longer participating in run away govt debt
ShortTLT,
Hoi polloi don’t understand puts. So Wall Street created easier gambling tools. I even bought calls in levereged short ETFs. NVD and SOXS calls for the win!
Veteran Cynic,
You are spot on. Tesla puts are pricey even when it’s unstoppable on the way up (even with Vix relatively low). I shorted Netflix and ServiceNow via puts in the last few days. Looking at Apple now.
Yes, I’m sure this will be the “hawkish” move that kills the bubbles and the persistent services inflation, unlike all of their other recent “hawkish” moves.
The standard, multi-decade response to that kind “irresponsible” responsible thinking has been…
“If you take a heroin addict off heroin too quickly, you might kill him.”
So here we are, decades later, 140% up to our asses in heroin.
Indeed. And the bond market doesn’t even believe that, pricing in no cuts at all this year.
This is wild. Fed futures are now predicting a nearly certain chance of a quarter point raise at the Jan meeting, and no change to the curve rate by the end of 2025
“which would ultimately drain ON RRPs faster to near-zero and shift liquidity to reserves”
If this means a source of treasury purchases dries up sooner rather than later, then great! I’m all for this to happen el pronto.
Hawkish as compared to the irresponsible markets desires. They should be increasing rate a quarter or holding steady while making unannounced sales of MBS into the market unti they hit zero.
Wasn’t the cut ✂ on Wednesday a bad idea? Of course, it was predictable based on guidance, but why does guidance trump policy?
My own view is that rates should be set by the market, as occurs over bonds, generally. It’s widely agreed, I think, that the market is saying they’re wrong….
FUN FACT : There are 8 US stocks that are worth combined $20 Trillion.
Nothing that a good rate cut can’t fix.
Not happening today, that rate cut is crushing stocks.
10-year yield spiked by 11 basis points to 4.51% currently.
With rate cuts like these, who needs rate hikes?🤣
But Wolf, aren’t you the one who thought the Fed was getting it right this time? I am older than you, and remember well when tall Paul really tightened, and we had a short recession afterwards, but he killed inflation for 40 years. It took some real heaving of money into the system to reignite it. The federal funds rate, as found on FRED would indicate that this rate tightening by the Fed wasn’t that much tighter than we’ve had during routine times since 1980. I read your column frequently, and find that you do your homework, but I did think there was a little bit of bromance with the Fed in your musings this time.
Bruce,
PCE Inflation isn’t 15%, as under Volcker, but 2.3%. Why these BS comparisons????
The inflation we now have, ups and downs, was perfectly normal before 2008. And today’s rates fit into that. Higher inflation, higher rates, that’s what we’ve got. Forget ZRIP. We’re back to the old normal.
Your “short recession” under Volcker… Nope, it was the terrible double-dip recession, the worst recession since the Great Depression. Volcker’s double-dip recession was enormously destructive to people that just started out and to small and medium-size businesses, many of which collapsed. We had 10%+ unemployment, and it didn’t drop below 5% until 15 years later. I got out of grad school at the time as unemployment was heading to 10%. Forget a career. Volcker laid out a path of enormous destruction. He’s no hero in my book. I wish people would stop these Volcker comparisons when we have 2-5% inflation.
LOL – so true. Mortgage rates back up to 7.13% today. Housing would have been better off with no rate cuts!
“but 2.3%”
Dated from *when*?
YoY both figures, 2.3% and 15%.
The Fed’s ability to affect anything is evaporating.
Just remember that the biggest, fastest, record breaking rallies in stock market history occur during bear markets.
Since we are blessed to be alive, aware of the most massive top in stock market history, let’s get in tune with the market.
It looks like the “safe” money is flowing into NVDA. This is hilarious.
Wasn’t it Volcker’s policies, and I lived through them too, that killed the inflation monster for over 3 decades?
(Then Greenspan et al brought us asset inflation, which inescapably brought back price inflation?)
FUN FACT: Tesla added $13.5 Billion in value per day for 60 days (for a combined value of $0.8 Trillion in 2 months).
Another way to look at it…Tesla added the market cap of Ford every 3 days during this 60 day period.
Ford market cap = 40 Billion
Tesla market cap = 1.5 Trillion
Just crazy irrational exuberance.
And today it lost the value of 3 Ford Motor Companies in 2 hours.
– 120 Billion lost today
Nothing to see here….
Many see. Few observe. Even fewer compare.
There is no future for Tesla. The 50% of the population who are receptive to EVs now hate Mush and will never buy one of his cars again and the 50% that love him hate EVs and will never buy one. So where are future Tesla sales going to come from? My ex and three of my kids all own Teslas but that’s the last one they will ever buy.
Escierto
30% of the US adult population don’t care about any of that. They’ll just buy the car they want because they want it. 30% of the US adult population = 30% of 270 million = 81 million, which is a lot of potential customers.
“The 50% of the population who are receptive to EVs now hate Mush and will never buy one of his cars again”
You’re sort of right about this. Sort of.
“and the 50% that love him hate EVs and will never buy one.”
You are so wrong about this that I frankly have to wonder whether you’ve been outside lately.
Tesla is comically overvalued and Musk is a creep and a scumbag, but I don’t know where on earth people get the idea that people who share Musk’s politics don’t like EVs. It’s 2024, not 1994. People across the political spectrum like EVs. The first person I ever personally knew who bought a Prius back in the early 2010s was a Tea Party guy.
Just read an article in The Guardian on the real prospect of Nissan and Honda merging. Nissan did build the Leaf, after all. A merger might produce an affordable alternative to Tesla without the drama and politics, etc etc.
Paul S
NONE of the big automakers that are active in the US should EVER be allowed to merge. They have to compete on price or die. I’m tired of these oligopolies, and mergers is how you create them.
@Pea Sea
The vast majority of anti-EV comments I see on Facebook or Reddit are written by a Trump supporter. EV discourse online has become extremely politicized, with comments like “you must drive a Tesla” “You must drive an EV” dominating the comment section.
@Escierto is correctly observing the sentiment on both sides, the only exception being Cybertruck owners who voted for trump. And that’s only because a podcaster bought Trump a Cybertruck.
Escierto is totally right…at least as far as States sales go.
My Dad, who was formerly an oddly environmentally conscious Republican, now foams at the mouth in anger at the mention of EVs (his religion told him to stop any thinking for himself and vote for T). I’m like, “Dude, no one is telling you you have to drive one, but it is perfect as a second car if you have two garage spots”.
My very smart and rich old man neighbor shit-canned his Tesla a while back. …I wouldn’t be seen with a Tesla.
So WTF is Musk doing? Courting ingrates when his primary company’s sales count on him *not* courting ingrates? I mean, overseas sales and all that, but what am I missing? Or he really is a genius and is getting in on the brainwashing the evangelicals bandwagon…
You are missing the reason Musk has gotten into bed with Trump, it is the grift.
What is the value to Tesla when Musk guts the transportation department and makes it that so that only cars from Tesla are the only ones cleared to use self driving nationwide so he can implement his robo-taxi fleet? Heck, maybe he even thinks he can get the federal government to subsidized those robo-taxies.
Or many environmental regulations are scraped and NASA gutted so he can fire off his rockets whenever he wants to without pesky regulations to bother him.
Of he forces the military to buy thousands of electric Humvee replacements from Tesla.
There is a lot of money to be made with a fellow grifter in office and anyone who would hold them accountable cowed by federal investigations.
It is no secret that like most wealhy people who get close to Trump, Musk thinks Trump is an idiot, but is he also knows a money-making opportunity when he sees one.
Thank you, JimL. At least I am not alone in this world.
Today I saw a Tesla with a bumper sticker which read “Awesome wheels, annoying CEO” alongside a zoomed-in pic of Elon making a goofy face. I guess that’s how you reconcile those two things.
Yep, even funnier it is up 7.5% from it’s Sep 2021 previous high vs +31.8% for s&p 500.
In a matter of hours vs weeks or months later,
DOGE laid bare the pork filled CR.
DC lobbyists and the Swamp will adapt I’m sure.
But it was enjoyable to watch. I’m sure Ron & Rand
appreciated the assist.
I suspect the DOGE investigation uncovered quickly the potential FICA bailouts prompting Trump’s desired abolishment, but who would keep anything in a bank without FICA? They are just legalized Ponzi schemes.
You mean FDIC?
The lobbyists are already all over DOGE, LOL. And Musk, potentially the biggest lobbyist of all, with his companies’ HUGE government contracts and exposure to government regulations, runs DOGE. So we’ll see how this turns out. For Musk, I mean.
So we should be upset that they exposed the pork in this bill?
I agree Wolf, post us a chart showing the growth in regulations.
May be a eye opener for some.
I wish DOGE great success. Who knows maybe the spotlight will guilt DC to do an actual budget. Maybe the pentagon will pass an audit. Its the season for miracles.
I know the narrative is for all to claim this A hawkish move.
A hawkish move is when they move, they moved and lowered rates 25 bp. Their views on the future could be considered hawkish to some, to me not so much since they could change their minds by tomorrow morning….but whatever, a dove, a hawk, a flying pig….
Seems they’re trying to assuage all of the above….dove, hawk and the flying pigs.
I’m going to say it again, I don’t think Powell even believes what he is saying right now. It clearly showed in his press conference. He knows that we’re in an everything bubble and inflation has completely anchored itself. This is no different than the late 70’s- 80’s. You have to understand that the Fed only lowers the velocity of inflation. They don’t concentrate on lowering actual prices. They expect that prices to fall on their own. Well, sorry Charlie, it doesn’t work that way in the real would unless we have a recession and businesses are allowed to fail. Prices are not, have not and will not come down as long as the Fed plays the role of the Wizard of Oz.
I went to Schlotzsky’s today for the first time in probably 2-3 months with my daughter. 2 small sandwiches, 2 chips and 2 small drinks were $24.00 and some change. Come on! This was closer to $16.00 (which was high then) just 2-3 months ago.
He’s stuck! He has no other moves available on the chess board until everything crashes. It appears the Bond Market doesn’t believe him as well! The 10 year rose again today!!
He just doesn’t have the balls to do what he should do and that’s to take rates higher, way higher, say 7-8% maybe 10% to induce a collapse and (drumroll please), let the market clear itself and wipe out those ghost businesses and tulip inclined investors that deserve to be wiped out I when the shit finally hits the fan. The thing is I fear that this scenario is going to be forced on us, regardless!
This is all a result of allowing the billions, maybe trillions of miss allocated investments to survive the last so called Great Recession. Period.
Got ourselves another one of them burn-it-all-down guys 🤣
No sane economist wants prices to fall. You’ll find out in a hurry how quickly economic activity can slow down. After all, if you can simply wait and have your money be worth more, then many people will just wait and hoard their cash. Then demand collapses, then companies don’t make enough money and collapse.
This might not be a large effect at very low levels of deflation, but it’s been documented for the larger deflation that often accompanies depressions (one of the reasons the Fed was invented!)
Wolf, you nailed it. There are some miserable people who have led miserable lives and rather than just better themselves they want to see everyone else suffer.
I’m puzzled by the market’s over reaction. Surely it can’t have expected another 50? The 2025 dot plot? That’s data dependent as always.
Before the 50 cut, some folks were saying there wouldn’t be one at all. This after Powell said he was going to cut, the only question being how much. This time he said things were looking pretty good inflation wise, so why would the market be disappointed with .25? At least it WAS a cut, when as some point out, maybe given all the market gains, it didn’t merit any cut.
It’s that Warren Buffett Sold a ton then Powell does this.
Bad signs.
And also the S&P has been tap tap tapping an invisible dome at the top.
Nick, it’s just the usual “buy the rumor, sell the fact” thing.
Count me in as well, PeaSea.
The Federal Reserves hyperinflation inflation , which it single handedly created is crushing a certain segment of our population…
And thats me, my family & my co-workers. I’m no fat cat & when I go grocery shopping and the bill is $280, I hope the Federal Reserve understands why it is so hated.
As I stand at the cash register , I think of Powell.
Sacramento refugee in Petaluma
Make sure you also think of Biden when you stand at the cash register — his policies were a very big part of the problem. And in a couple of years, you’ll get to think of Trump when he owns the inflation that we’ll have by then.
I’m left wondering how much inflation would have to re-accelerate for the Fed to put an increase back on the table…
If annual core PCE inflation (now 2.8%) gets closer to its policy rates (still over 4%), you’ll hear it talk about rate hikes again.
With inflation trending up and the Fed continuing to lower rates, it might not take long for those values to meet in the middle.
I’m also curious how Trump will exercise his new unlimited immunity for “official acts” in relation to taking control of the Fed.
We know Trump wants lower rates, he’s said so many times, including the last time he was in office.
He can’t *fire* Powell, but now he can, or at least threaten to, *remove* him by any means necessary with zero repercussions.
Trump can blame Biden for inflation for a while, but eventually, if inflation stays high or goes higher, he owns it in the eyes of the American public, and Americans hate, hate, hate inflation. So Trump will be better off by making sure the Fed can do what it needs to do get and keep inflation down.
That is probably true (that inflation would hurt Trump. but, if you’ll forgive the mixed metaphos, a leopard-dove can’t rearrange its spots so that it becomes a leopard-hawk.
Trump believes in low rates, low taxes and big deficits, and I doubt anything short of full-on crisis could make him change course
further to that point, if there is to be a recession, trump would be well served by having it start very soon, so that he can blame it on biden, and then be the firefighter who puts the fire out and has the economy recover under his watch.
if the recession doesn’t start until 2 years in, he’ll own that too.
With only two cuts expected in 2025, Powell is now officially in a holding pattern. I’d suspect core PCE inflation of 3.2% will put rate hike chatter squarely in the mix. Letting core PCE move towards 4% would be absolutely crazy, since continued rising inflation means future rate cuts fall off the table. If core PCE inflation makes it to 3% with a stable jobs market, I think we’d say with high confidence that we’re probably into a very lengthy up trend.
Inflation adjusted Fed funds rate has been around 2% for about 18 months now. That’s the highest since 2008 and typical of historical rates during good economic periods, consistent with an attempt to cool the economy but not drastically.
My guess is that the Fed would be very content with 2-3% inflation and 4-5% Fed funds rate until the economy starts to struggle.
TNX = blast off higher….
“Arif Husain is the head of Global Fixed Income and Chief Investment Officer (CIO) of the Fixed Income Division of T. Rowe Price. He is also a member of the firm’s Management Committee. Husain holds a B.Sc. (honors) in banking and international finance from the City University London, Cass Business School. When Husain speaks, Wall Street listens.
What Husain has been saying since October is that the U.S. is on a collision course with higher interest rates.”
Husain is calling 5+ and perhaps 6% tnx …
that should fire hose some seriously cold water on home buyers
TLT is back <$90 and my puts are doing well.
REITs wreck … film at 11!
“Cleveland Fed president Beth Hammack who preferred no cut”
So one of them gets it.
Agreed. I think Hammack is right.
Trump should fire JPow and nominate her as the head. Only clear thinking person on the committee.
AHAHAHAHAHHAHAAAHA. Trump will be skewering Powell for not slashing rates down to 0% THE MOMENT he takes office. Just watch.
LOL …..
1. Trump cannot fire Powell.
2. Even if he could, he would never, ever nominate someone like Hammack. Trump WANTS lower rates while he is President. He WANTS an overheated economy.
3. Remember that Trump was the one who openly attacked Powell when Powell tried to raise rates during his first term.
It will be interesting to see what the courts say about it if JPow gets fired. It is unclear how anyone who is exercising executive authority can be independent of the President under Article II of the Constitution.
I think it is pretty clear most of them get it. They made it clear cuts are going to be few and far in between if the current environment persists.
I think this cut was recognition that they have had rates FAR above the inflation rate for a long time, but that future cuts were not going to happen unless inflation clearly drops.
And the Cleveland fed produces an inflation nowcast
It really is something that huge industries like cre and residential resale can be frozen yet everything is awesome. Seems like there will be an inflection point when folks least expect it. I know that Wolf has been beating the higher for longer drum forever. But has anybody *really* believed it?
“…yet everything is awesome.”
No one with a brain says that. But OVERALL, the economy is growing at a very solid pace, DESPITE the issues in RE.
Real estate, home building and all suppliers tied to it. Machinery…zero percent/60 months for any
Equipment I’m looking at.
Apparently none of this matters to the NEW economy.
Our business survived GFC.
Only debt we have now is new car loan
Would have paid cash…but they were offering 1.9 percent.
Business: was debating new excavator, this close to retirement…will put money and my time into
What I currently own. It is still a struggle when it comes to finding replacement parts.
Market currently crashing and ever index down by over 1%.
Will this be enough to turn off the AI/Crypto hype trains and quiet the real estate crowd?
I’m sure Lawrence Yun can somehow spin it.
Here is was in November….
“NAR Chief Economist Lawrence Yun Forecasts 9% Increase in Home Sales for 2025 and 13% for 2026, with Mortgage Rates Stabilizing Near 6%”
Sales could very well rise by 9% in 2025 from the 30-year low in 2024. But they’d still be very low.
Precisely. Spin doctors can use percentages without actually telling a fib. They just don’t show Wolf’s graphs.
i doubt it. if i had to bet, i’d bet housing sales drop even more.
buyers are now projecting price drops, so many are waiting.
No.
Down 1-2% is a normal orderly decline.
“Crashing” is a drop more like 5-10%.
We may yet see “crashing” but odds are against it, not for this situation. If earnings start to smell bad in the New Year, though….
Maybe not a crash but now NASDAQ is over 3% down in only a few short hours.
A 30% drop in a week would be a good start.
>Will this be enough to turn off the AI/Crypto hype trains and quiet the real estate crowd?
These people have spent 15 years watching every dip be followed by a bailout and new all time highs. They are not going to go away unless they feel some prolonged pain.
@Anon: As the CryptoCrap bandwagon is supported by both co-presidents (for their own Crypto Company in one case) I am sure the train is speeding up, especially if fueled with taxpayer $ as advertised.
1% down and “crashing”…
Trying to learn:
Is this the rate that the Federal Reserve is saying should be 2% along with inflation?
No, the Fed INFLATION target is 2%. Its policy INTEREST rates are much higher, now at 4.25%-4.50%.
Its longer-run INTEREST rate projection beyond 2027 is 3.0% if INFLATION is at 2.0%. So longer term, it sees its interest rates as being 1 percentage point higher (3%) than inflation rates (2%).
Excellent.
Thank you for the correction/information.
The fed wants 2% inflation….they say that constantly like wishing a toy from Santa.
I would like to be 25 years younger with two beautiful wifes, living by the ocean with a black cat purring in my arms…
Flying reindeer…2% inflation..
Yea, and bitcoin becomes the new U.S. dollar when the government can no longer finance the debt. But then like Roosevelt wanting you to turn in your gold, the government would want you to turn in your bitcoins.
Gold down 2%… BC down 5.8%
Bitcoin becomes the new digital toilet paper “when the government can no longer finance the debt”
Buttcoin I mean bitcoin will never replace the dollar because you can’t pay your taxes with it, which is the primary purpose of dollars.
This is at odds with Trump pumping zero rates —
Market down 600 Points as we speak, heading for a possible 800 point loss as stop losses are triggered. BidenIflation is alive and well, and the Fed should NOT have cut rates. They are wrong now just as they were wrong in 2022.
Still waiting for an example of a 5% CD…..
Good luck with that!
Who needs a 5% CD when you can get a 5% savings with PiBank?
That seems too good to be true, but they do in fact advertise that on their website – and they claim to be FDIC insured.
Am I missing something or is this a genuinely good deal? I’m getting 3.8% on my Cap One liquid savings account and just recently opened a 4.5% 6-month CD.
LOL BidenInflation???? It amazes me just how poor you are at choosing sources of information. Why do you choose ones that regularly take advantage of you?
You should be happy. Your cult leader is calling for a government shutdown. Shutting the government down will cause a lot of people a lot of pain and start the world burning. You will get to enjoy watching other people suffer and it will help you forget about your misery.
Sheesh. Glad someone called him on that.
Looking in the mirror, and then reading your comment I realize one of us must be a damn fool. It could be me…surely it must be me. I’ve never been accused of being very smart.
I guess it’s too much to ask that congress simply pass a clean CR to fund the government. Legislation that might require 20 pages. Instead, it’s a 1500 page monster and 2 days to read it.
This is a classic abuse. Wait until 2 days before a deadline and then lard up a must pass bill with a ton of graft. Trump is not calling for a government shutdown, hes calling for an end to this sort of abuse. Entirely consistent with his call for an end to the Debt Ceiling circus which is really just another vehicle for graft and abuse.
Everyone says the country will have to endure some pain to fix our problems. But then we get the hand wringing about the pain of a government shutdown as the reason we just have to allow another round of pork and abuse.
The entire problem/solution set facing the US and Trump is full of incompatible contradictions. In summery, the US needs a strong dollar while simultaneous the US needs a weak dollar.
There is no way to square the contradiction. The unspoken policy for now is to plunder the imperial provinces. That is the last, time-buying act that probably buys us another year or 2. So we export pain, but eventually…eventually we either accept pain or it is imposed on us. The CR is as good a place to start as any.
Good summary, danf51.
I would offer another “incompatible contradiction:”
Maximum employment and stable prices
Reform the central bank.
The Fed’s past mistakes are catching up with it. When they reduce the short term rate, the 10 year rate now INCREASES. Its a clear sign the Fed is losing control of long rates. Notice the nice pop in the 10 year rate after the Fed’s announcement today.
The question is, will the Fed allow price discovery caused by an increasing long term interest rate, or will they try to avoid it with another round of QE as recession threats appear?
In any case, within a few months, I expect to hear an announcement about the ending of QT . The rise in long rates makes the Fed very nervous. All kinds of crazy notions and programs could be around the corner.
I hope they stick to providing emergency liquidity in times of trouble, as Wolf proposes, but I view that as an unlikely scenario.
“When they reduce the short term rate, the 10 year rate now INCREASES.”
Perhaps just the yield curve normalizing rather than an out of control bond market.
Bobber,
1. ” Its a clear sign the Fed is losing control of long rates.”
it doesn’t even try to control long rates. It’s doing QT for a reason… to unleash long rates. If inflation is 3-4%, the 10-year yield should be 5-6%. That’s the old normal. There is nothing to make the Fed nervous about.
2. You’ve been wrong about your end-of-QT predictions for over a year.
Eventually they will end it. So eventually you will be right.
But even after they end QT, they will continue to shed MBS and they’ll replace longer-term securities with T-bills, both of which will continue to put upward pressure on longer yields, mortgage rates, etc., maybe more so than QT.
Term premia have been very benign despite the Fed’s determination to destroy their credibility on inflation.
The possible logic is that markets don’t want to be caught out selling duration if we have another March/April 2023 banking crisis giving an excuse for another huge chunk of QE. This logic could also explain why gold has outperformed hyper bullish equities this year despite rising real yields. I will have to check but has gold ever outperformed equities in a 20%+ year?
I thought QT would begin sooner in response to an asset price drop this year, but I was surprised again by the Feds dovishness on interest rates. They reduced interest rates, including the .5% panic whopper, with asset markets making new highs and the inflation fight stalled at 150% of target. It juiced the stock market, as did Trump’s victory, obviating any need to end QT.
I don’t have a crystal ball. If I did, I wouldn’t have shorted the S&P500 with you a few years ago.
Exactly – the Fed WANTS to normalize the yield curve.
Bond volatility has been significantly elevated since the curve inverted in 2022. The Fed wants to see the MOVE index lower.
Beyond unlikely.
The balance sheet will be higher in 5 years than it is today.
The economy will be bigger too as will currency in circulation, the government’s checking account at the Fed, etc.
It is interesting that the longer notes/bonds yields are rising in the face of rate cuts. I can’t remember the last time that happened and does seem like a change of behavior over the past few decades. Wolf has, of course, been writing about rising yields as well. Lets remember: the Fed is still selling bonds and has plenty of options. It just may be that yields are responding to a long campaign of QT. I can’t remember, either, a time when there were rate cuts and QT at the same time.
I’d like to ask people who have been around longer than I have or have a better memory than I: Was there ever a time you can remember where there was a multi-month period where the long yields continued to go up while the Fed was in the process of multiple rate cuts?
I feel that the best explanation for long term bond yields going up is uncertainty due to what may or may not happen in the next 4 years. For instance, will tariffs be used merely as a bargaining tool or will they actually be put into place which will cause inflation?
I have no idea, it is make a guess, and if there is one thing markets hate it is uncertainty. why would anyone want a long term bond right now when short term notes are paying nice returns? I would invest in short term and wait for a few months before long term investing when things are more sorted out.
Fed has never controlled long term rates. Longer term rates respond to the market. The “market” here is the $34 Trillion in Gov’t debt. To finance that you need to attract buyers – thus the long term rate will increase. Expect 10Yr over 5 shortly.
“Expect 10Yr over 5 shortly.”
100% agree.
You have repeatedly made the comment that the FED is losing control of long term rates and have repeatedly been corrected that the FED doesn’t even try and control long term rates.
Do the constant corrections not even register with you? Even a stupid 5 year old child learns not to touch a hot stove. How do you constantly not learn?
How long are you willing to look foolish and be wrong about the end of QT?
LMAO. Ever heard of QE, QT, twist, or yield curve control? Open market transactions in long term instruments impact long term rates. I shouldn’t have to point that out.
Your readiness to insult speaks for itself.
Mr. Market told me (well in advance):
– The FED was to cut rates 25 basispoints.
– No new rate cuts in the near future.
The Fed told you in advance…
I just noticed that the US yield curve has been “uninverted” since early september of this year.
Only a small portion of it uninverted in September.
I might buy some more NVDA if the discount gets juicier. This is a normal correction. We’ll be back up before EoY
What counts as juicy discount from $3.5 Trillion? Thanks!
Discount? You must fall for a lot of Black Friday “discounts”, too.
Are we allowed to say that at this point, the yield curve is now un-inverted?
I realise the 20 year is still higher yielding than the 30 year, but everything else seems to be in line. Longer terms are higher yields.
If so, does that signify anything at all?
It used to foreshadow a recession.
These days? Perhaps not
no, the curve inverting signaled a recession. not uninverting.
An inverted yield curve has often preceded recessions, average 12 months or so. The un-inversion is often associated with the recession. Poor choice of words on my part.
Inverting yield curves once signaled recession, sort of. They don’t signal much of anything anymore.
I think the technical term is undisinverted curve. It’s like dis-inflation but with ‘un’.
It does signify that “it crashes”. You’re welcome.
The 20-year isn’t as liquid since it’s a relatively new thing. But overall I expect to see more term premium. Durations measured in decades should be yielding a full %+ over those measured in months.
Powell like to say their decisions are data driven. So what is the secret data? The available data has nothing indicating a rate cut is on order. Another quarter of such data and a rate increase is on order.
The Fed has had a very asymmetrical response for several decades now.
So cut is in anticipation and hikes are when they see the eyes of inflation.
I would assume this trend will be permanent because of fiscal and monetary conditions. Both Fed and government have used up most of the ammunition. So they have tools to cool but not enough to restart the economy.
Has anyone considered the scenario where inflation continues to rise and Trump’s efficiency team begins laying off government employees, leading to increased unemployment? What would the Federal Reserve do then?
If they succeed in laying off 10% of federal government civilian employees, they’d lay off 240,000 people or so. There are about 7 million unemployed people right now, in this huge labor market, so it’s just a drop in the bucket that wouldn’t really make a dent into the numbers. The federal government civilian workforce is only a little larger than Walmart’s US workforce.
Beg pardon, but who is Elon going to lay off? Putting aside requirements (Medicare, SocSec) the discretionary budget is $1.9T. About $850B of that is defense. Not a lot left to cut IMHO….
Milo – my general understanding is that significant layoffs would require legislation. They may not be interested in that…
“Trump’s efficiency team” is a term to take advance of people who are ignorant about the government and what actually happens.
It is the same as making the ignorant think that there will be trillions saved without cutting Social Security, Medicare, or the military. These people just have no clue about federal spending.
The efficiency team has no power–the whole Musk/Ramaswamy thing is just a way to give them a PR “win” as both are big on this, but nothing of real import can happen.
It’s quite similar to “establishing a commission to investigate” or “hiring consultants to analyze”.
“We’re designing a study to assess the relevance of the previous study we designed”
“So cut is in anticipation and hikes are when they see the eyes of inflation.”
You’re half right. Hikes are when inflation has grabbed them by the throat and shaken them around like a rag doll for a full year or more.
DRM,
I’m so sick of this BS. Here is the data:
PCE Inflation = 2.3%
EFFR = 4.58% before cut. DOUBLE the rate of inflation
The Fed’s rates were 2.2 percentage points over inflation. Inflation was 8%, but that WAS three years ago. It has come WAY DOWN.
So I’m wondering why Wolf wrote the previous article titled “The Fed Needs to Watch Out to Not Throw More Fuel on this Demand: Retail Sales Accelerated Sharply in the 2nd Half”
If he is sick of the BS about all of this, seems he too thought a rate cut might not be called for, but one day later thinks such thinking is BS. I think the PCE and fed rate were at the same ratio the previous day when he penned the article. Seems instead of that article he would have said, “hey, don’t worry a rate cut is definitely the way to go because PCE is only half the Fed rates.”
Quit posting this BS. You have no freaking idea what I “thought.” STICK TO WHAT I WROTE.
MW: Dow tumbles over 2% after Fed lowers interest rates, signals fewer cuts in 2025
1:01 PM 12/18/2024
Dow 42,326.87 -1,123.03 -2.58%
S&P 500 5,872.07 -178.54 -2.95%
Nasdaq 19,392.69 -716.37 -3.56%
VIX 23.72 7.85 49.46%
Gold 2,607.80 -54.20 -2.04%
Oil 69.99 -0.09 -0.13%
Microvision up 12%….?
LAZR down 9%…?
Gold finally responding to higher rates? That’s how it traditionally went…
It was a most excellent day in marketland today! True price discovery is finally hard at work and really happening!
I think Powell wants Trump to push him out the door before TSHTF. Trump will get the blame for what follows and Powell
will retire to collect his speaking fees like
Bernanke .
Bye the dips before it is too late!
For a SoCal Beach Dude you should know what a minus 3.0+ tide is.
You might want to wait and see who is swimming naked before buying any dips right now.
Tide just went way out very quickly. I’m not going to call it a tsunami harbinger, but damn if it wasn’t immediately after the Fed made their remarks.
Dj T’s cavalier stocking of his Cabinet only adds fuel to this fire in my opinion. Uncertainty abounds.
Big money can afford to “lose” millions on the swings if it means billions on the upswing.
Some of the greatest fortunes ever made were during the Depression. But you had to have the money to make the moves.
Be patient and observe the Kabuki theater until January 20th.
I said BYE the dips, not BUY the dips!
Yes you did. That was funny. Thanks.
Ghost:
I so agree with your “Uncertainty abounds”. So why buy long term with so much uncertainty?
Markets will go up regardless. Lots of money out there and it has to land somewhere, not to mention corporations expect Trump policies to be beneficial. High tariffs tend to not be beneficial, or at least if you look at how steel tariffs barely created anything of value there but more negativity impact agriculture in US. Not like the moves last time created more revenue, jobs or anything else. If anything it will shift imports from China to another country like Vietnam. More tax cuts will just increase the deficit and even if tariffs could offset revenue, which it would make a difference. This isn’t the 1800s where revenue from tariffs were significant and government much smaller.
I get there are various opinions with Fed members but would be better if they called it the dartboard plot.
It’s like getting a giant box of candy for Christmas from your doctor with a note attached “You need to schedule a test for diabetes in the new year.”
Watching the Fed is like reading Alice in Wonderland. None of it makes much sense. Economy is strong, labor market is strong, spending is strong, inflation is accelerating. Powell said all this in his news conference. So what does the Fed do? They lower rates.
Well, long term Treasuries jumped again. Treasury bond traders are not buying Powell’s bs. They are telling the Fed that its policy will drive inflation higher. Same in the FX market. It is okay with me. I can live with 4.38% on three-month Tbills, with the likely prospect that we will be seeing higher rates with Trump’s possible tariffs, Trump possibly removing a big chunk of the labor force, and the Fed continuing to live in their fantasy world of up is down and down is up.
You don’t get it. The Fed has said for two years:
“HIGHER FOR LONGER”
= HIGHER INFLATION & HIGHER RATES.
And the Fed nailed it. And I repeated it here many times over those two years. You just didn’t believe it. Today the Fed reiterated that.
It’s just that there are some goofballs that think the Fed’s rates are going back to nothing, and mortgage rates back to 3%, LOL. Mortgage rates today over 7%, which is where they should be.
Get used to it. Inflation isn’t going back to 2% and rates aren’t going back down where they were either. We’re back to normal, like we used to be before 2008 QE.
In this context, 7% mortgage rate might be viewed as a bargain…
Might see 8% in 2025…
Wolf, are you sure you are not responding to somebody else? I was simply talking about the economy today and Fed’s reaction to it. I am a huge fan of “higher for longer”. However, today’s 25 bp drop makes no sense if the Fed is looking at the data, which they always say they are doing. Same thing happened when they dropped 50 bp.
I favor back to normal rates (about 4.5% for FFR on average over the last 50 years). I am complaining about the lack of logic behind today’s 25 bp drop. I see one of the members of Powell’s merry band agreed with me and voted against the drop.
Oops, yes, this comment got misplaced.
The FED’s BS target of 2% is such a sham. Powell always dodges and weaves when asked when we will actually get to 2%?….his answer is always “eventually”. LOL!!! The FED wants higher inflation say 4-6% to inflate away the debt, and keep home prices and stocks “higher for longer”. They refuse to allow what is truly needed by most Americans and that is DEFLATION, not disinflation.
Over the past two years, there has been large-scale deflation across durable goods, from used vehicles to laptops. Gasoline has been in massive deflation over this period. Lots of prices have fallen, and we documented this here. But you don’t like those falling prices? Deflation in manufactured goods is normal. The 2021-2022 price spike was abnormal.
The inflation shock we saw over those years will eventually be overcome by wages that have been rising faster over the past two years than inflation, and so over time a hot economy with rising wages will overcome the overall price increases. But it takes years, and people are rightfully pissed off about the inflation shock.
But if there is widespread deflation, people will have to give up their wage increases they got, and wages will go down, and falling wages will be a worse shock than the inflation shock.
Below, I’m asking an honest question. I’m NOT trying to pick a fight. I’m trying to understand what I missed.
Prior to yesterday, when did the Fed signal higher INFLATION for longer?
Here’s the Fed’s 2025 PCE Inflation projection, by SEP release:
3/2023: 2.1%
6/2023: 2.1%
9/2023: 2.2%
12/2023: 2.1%
3/2024: 2.2%
6/2024: 2.3%
9/2024: 2.1%
Averaging those numbers, you get 2.16%. To me at least, 16 basis points above target is not “higher for longer.” It’s measurement error.
The Fed has been extremely clear that RATES will be higher for longer. And objective, analytical folks (such as you, Wolf — and what I strive to be) could and can see the (very high) likelihood of higher-for-longer inflation.
But I don’t see the Fed as having SIGNALED higher future inflation.
I suspect the markets got spooked yesterday because the Fed finally said the quiet part out loud — INFLATION will be higher for longer — while simultaneously cutting.
“I’m trying to understand what I missed.”
So if you look at the data you cited, you will see that the Fed’s inflation projections for the end of 2025 have risen from 2.1% in March 2023 to 2.2% in March 2024, to 2.5% yesterday. Higher for longer.
To use your “3/2024: 2.2%” data point: That was the PCE inflation projection made in March 2024 for the end of 2025, and it was HIGHER than its projection for 2025 a year earlier (your first data point) of “3/2023: 2.1%. In yesterday’s SEP, the 2025 projection rose to 2.5%.
obviously over the very long term, the Fed always projects 2% PCE inflation because that’s its target. And that has now moved to 2027. But the nearer-term projections are somewhat related to what is going on now.
Thanks.
Maybe I’m just dense — but I don’t see 10-20 basis point revisions as moving the needle, from either a fundamentals (or market expectations management) perspective. 10-20 basis point squiggles can easily be noise — especially in a forecast.
Let’s see where this plane heads….
Until the next liquidity crisis, haha
There’s always hope, isn’t there? During the March/April 2023 banking crisis, the Fed RAISED rates and continued QT though it threw some liquidity at the FDIC and at the banks, temporarily, and not much later, nearly all of that liquidity was re-absorbed by the Fed:
Astute perspective.
Why did markets dump so hard today?
The new SEP was consistent with market expectations, if not on the slightly dovish side. Federal funds futures as of yesterday were pricing in ~0.375% of easing in 2025, or a toss-up between 1 and 2. The SEP median was 2.
SEP median neutral dot crept up just slightly from 2.9% to 3%.
Rate cuts originally projected for 2025 were simply pushed out to 26/27 in the SEP.
FOMC is giving themselves until 2027 to reach 2% PCE.
What exactly was so hawkish about this meeting?!?!
🤣❤️
Did you listen to Powell? We might not even get those two rate cuts next year! The CNBC guy Liesman put his finger on it at the presser: That “recalibration period” of monetary policy that started in September may already be over.
Powell immediately dismissed Liesman’s characterization of a “recalibration period”, but later on said we are perhaps in a new “phase”. I watch and listen to Powell carefully, because he is actually kind of funny. I have no respect for him as an economist, which he admits he is not.
Didnt he also say that todays .25 cut was a “close call”…implying that there was some hesitation to even do this cut. That lends credence to your “We might not even get those 2 rate cuts….on the other hand, the “FED is data dependent”, it could be by this time next year rates are back down to 0
What we really need, is a good old-fashioned double-barrel blast of QE, including MBS acquisition.
Now we wait for the Depth Charge tirade.
What we need is a deep depression to clear out the weak players!
QE will not stop falling demand and deflation.
I hope both of you are joking, in which case this was pretty funny.
If not, both of you are completely nuts!!!
The crybabies on wall street are throwing a temper tantrum about how Powell won’t give them ZIRP back.
Has Mr Richter been on a podcast recently?
No, YouTube killed audio-only podcasts, and I’d have to switch to video, but don’t feel like it.
Could be the start of a significant correction, with the FED’s cuts continuing to have the opposite effect, this is just crazy: the top tier conventional 30yr fixed rate will easily be back over 7% for the average lender and the 10-year jumped 0.114 to 4.519!
Take a look at the Agencies – Farm Credit Bank, TVA, Fed Home Loan Bank.
Getting 6.25% on longer term paper now.
Pay attention to the continuously callable paper. It tends to trade at par. So 6% today for 20 yr paper which will trade around par (range: 99.5 to 100.5). If you need your cash, generally no significant hit if you trade out.
“Getting 6.25% on longer term paper now.”
Really? And they haven’t been called?
All my 6% agencies were called earlier this year :(
My crystal ball shows “official” inflation at ~2.5-3%, the 4-week at 4.4%, the ten-year at 5%, the 30-year at 6%, and mortgages at 7%. That’s the prayer for 2025 and the whole thing will be balanced on the head of a pin the whole time. If Powell actually stays on the job on purpose I’ll be surprised if he breathes at all next year. He may welcome the chance to submit his resignation early.
“if he breathes at all next year” I’d not mind if he did not.
Bond market, 10 yr us treasury climbing to 4.52%
Ruh ouuu/ Fed
ruhhhh Ohh,,,,,,,,,
Today almost looks like a rug pull. Nasdaq down 3.56%, S&P down 2.95%..
Doesn’t meet the 10% threshold but the timing of when the Fed spoke and the market got rugged can’t be denied.
Fed lowers rates in part —as I understand it—to allow for lower rates being paid on US acculated & growing debt into the future. So far it’s back firing as now both short & long term rates look to be moving higher. Is it practical for the government to finance our debt with 30 day or 3 month TBills if long term rates continue higher?
This is good news to clearing out the deadwood CRE with price discovery. I have much better idea what to offer and make it seem “reasonable”, although I have them by the balls. Extend and pretend to 2027 is the new motto? I expect hair on fire haircuts in 2025.
I just closed on a three year deal with options on one of my investments. I offered CPI rate increases, but they wanted a higher fixed rate increase. I had to pause for a minute, because the downside could be very bad for me. But overall, the deal was very solid. Not long ago, CPI rate increase was just boilerplate text in the lease. Now, serious considerations must be made.
Wolf, I hope you got the c-note.
Was that you? Thank you!!
Powell’s admits his inflation projection has “kind of fallen apart”, yet he fights it with a rate cut?
Good thing he’s not a fireman. Fight a blase by pouring on just a little gasoline.
That’s actually one of the ways they fight wildfires.
Haha, nice try! This isn’t a “backburn,” this is loading the aircraft tanker with fuel instead of retardant.
Replace Powell with someone willing to reset QT back where it was originally.
Nope, cannot happen for four reasons, so read this, it will tell you what you need to know:
https://wolfstreet.com/2024/03/23/the-feds-liabilities-how-far-can-qt-go-whats-the-lowest-possible-level-of-the-balance-sheet-without-blowing-stuff-up/
Even in the nearly 100 years before 2008 QE, the Fed’s balance sheet constantly grew, at the time due to currency in circulation. So click on the link and do read that article.
Here is the balance sheet from 2003-2008:
What if the neutral rate doesn’t exist? Warren Mosler doesn’t think it can in the context of being off the gold standard.
Seems many people, including the Fed, like to talk about the “neutral rate”, but nobody can say what it is. Perhaps they should just forget about the term, and quit sounding like imbeciles.
Apparently the neutral rate was the rate at which the gov’s gold reserves didn’t accumulate or deplete from redemptions – when treasuries offered enough of a yield to defer gold redemtions, that was the neutral rate.
But I’m not sure I agree with Mosler – Treasuries compete with other assets and investments for dollars in the current year. At some interest rate (for a given duration) people would rather buy stocks / gold / housing /etc. than Treasuries.
The so-called ‘gold standard’ was just a trite and totally failed experiment from 1873 until 1933 at which time it was totally discarded in the US for all domestic purposes.
Wow, what a day. Based on WR’s articles, we kind of saw it coming.
Thanks WR.
That was today … but lots of competing factors ahead.
A higher US dollar will help reduce inflation (unlike Canada where a lower dollar is going to try and push it higher).
Trump’s deportations will lead to higher wages (inflationary).
AI is just starting to decimate jobs. We are not far from bigger layoffs.
The economy is artificially strong because of massive deficits as a % of GDP, and these deficits are happening in good times.
Interest costs on the debt will increase as rates stay higher, increasing the deficit.
The amount of debt that needs to be financed (and refinanced) will keep rates higher almost on its own.
Overall there is the potential of higher unemployment from AI and attempts at deficit reduction (job cuts) leading to bigger deficits and even higher rates needed to find buyers for the debt.
Trump is in for some rough times ahead.
What happened to my post Wolf?
You double-posted the same comment (happens quite a bit, even to me). I deleted one of the two. The other one is still here somewhere, in reply to “Home toad.”
Yes there is QT, but not enough of the their MBS portfolio, which could have worked to lower housing-related inflation that’s become so entrenched.
Volatility is back. IWM a [4.43%] day. QQQ a [3.61%] day. More 3% plus days will come. They don’t indicate directions. They might come in a downtrends and in uptrends. We might get a few of them in the next few years. Don’t listen to JP Fed Day bs. Follow his actions. When he talks the other Fed bankers are laughing at u.
In Nov, Dec and in Jan Consumers might preempt Trump’s 25% tariffs on Canada & Mexico and 60% on China. It might be an aberration. Perhaps not, perhaps a climax !
If a nothing burger can drop the market like that, might not be a good place to be.
That wasn’t a nothingburger. That was a double-decker luxoburger for markets because they’d been delusional.
Powell and his committee come across as relatively uber-hawkish, which is good, yet at the same time drop 25 bp, which is clown world. What are they smoking? Are Fed officials required to take annual drug tests?
So England held at 4.75 with a rise of 2.3 to 2.6 in inflation. I don’t know if they have dot plots. They don’t know of amount of rate cuts or any ahead of 2025. Just comparing a bit. Can’t wrap my head around it, something I’m missing?
Lots of Fed hate for this rate cut.
What if the Fed wants to reduce all the interest income because it feels that’s stimulative? If the USG is paying out nearly $1T in interest, someone is getting that interest, and it’s generally not poor people who own Treasuries.
In general, paying interest = giving money to people who already have money.
Just whom do you expect the US government to borrow money from? People who don’t have any money to lend? Interest on loans is not ‘giving’ people any money at all, but rather the payment for the time value of money loaned. And that’s not a Federal Reserve issue.
Lowest Comfortable Level of Reserves (“LCLoR”) may be lower than people now calculate.
I understand the time value of money.
But it’s undoubtedly true that people receiving interest payments already have money. You need Treasuries to receive interest, and you need money to buy Treasuries.
To put it another way: what is the median net worth of domestic holders of Treasuries?
What on earth difference does that make?
Because if interest income is stimulative, and specifically stimulative for those who already have assets… and the Fed isn’t trying to be stimulative…… then maybe, just maybe, the Fed is justified in cutting rates.
In general, higher rates = higher pay for creditors.
I am a creditor of Uncle Sam – I own Treasuries of various types and duration. When rates are higher, I make more money off the gov’t.
See?
I’d rather 2.5% inflation and no recession than a recession. Like 1995/96. IMO that’s the closest we have to a soft landing.
Still, wild the Fed says “Our projections for economic growth have risen” and the market proceeds to sell off. Even gold is down.
The size and breadth of QE was a galactic mistake by the FED.
Sooner or later we are going to have to Pay the Piper.
Cracks in the dam are starting to give way.
Over $10 trillion of Federal Government matures next year.
Grab your popcorn.
Really? And on top of that, how much new debt will they have to issue? Another $2 trillion, probably. Doesn’t look good…
So basically, a trillion every month. That’s crazy and with this higher rates which would probably go even higher because of all that.
My company has blocked your site at work. May be you will be put on the no fly list soon.
1. Did you click on a link to my site, such as in an email someone (me?) sent to your corporate email account?
2. Or did you try to go directly to wolfstreet.com and were blocked?
If it’s the first, then there is some generic security setting in your company’s network that blocks external links in your business email account from working. You can ask your company to change the settings for wolfstreet.com, and good luck with that. You can also try to subscribe with a different email, which might work. This is stuff is not uncommon.
If it’s the second, I’m going to end up on the no-fly list for sure.
Wolf, I can still access your site just fine on my company’s internal network.
If they ever block Wolfstreet I’m quitting lol.
It’s Xmas time. A lot of mid mgt are getting an email : we no longer
need your services. That’d is your package. Please sign.
And the stock market is back up today, shrugging off yesterdays news.
Everyone believes in the fed put so big corrections might be a thing of the past.
I’ve been saying this for 2 years, when you have a population that believes that real estate and the stock market will only go up in the short to medium term – because of the fed put – the only thing that will bring inflation down will be some sort of black swan event or a moderate recession.
I used to think a mild recession was all that was needed but after 2 years of making things worse, it probably needs to be a moderate recession to make people scared enough to pull back on spending.
And that panic .50 point cut – re-iterated that to the market, anything goes wrong don’t worry, the fed will come to the rescue.
Can’t correct this business cycle without resorting to a command economy.
Short-term money flows could fall at the beginning of 2025. A countercyclical policy will raise inflation.
There is no ‘Fed put’ so where do folks come up with such BS?
Not sure I’d characterize the 50bps cut as in panic – although probably a miscalculation in hindsight.
MM1,
“And the stock market is back up today, shrugging off yesterdays news.”
Just took a little while, failed rally, bad sign. The S&P 500 dropped 69 points from morning to close, ending in the red.
LOL Nobody likes the FEDs cuts or hikes. It looks to me as if they tamed high inflation and now want to ease into a more normal inflation rate.
With the US and other Government continuingly printing debt which is inflationary, the FED has a tough job at keeping thing balanced between controlling inflation but not hindering the economy.
Wolf you said RRPS can be emptied into reserves. There is only 130~ billion left in RRPS as of today. How much of a buffer is there in reserves to allow QT and government issuance of new debt to continue without a massive spike in rates or run from other asset classes?
There is a lot more going on than just that. The Fed announced today that it will be testing its Standing Repo Facility (SRF) at year-end when liquidity strains are usually the largest, by adding a scheduled auction in the morning, so two auction times, the temporary new one in the morning, and the existing one in the afternoon, because banks see two big surges of demand for liquidity during the day in their reserve accounts: in the morning to settle sales of securities, etc., and in the afternoon to settle regular other transactions.
The SRF is what the Fed used before 2008, before QE and before the “ample reserves regime,” to supply liquidity to the banking system, and it worked, no QE needed, not even during a crisis. It seems the Fed is laying down another paving stone on its path back to how it used to do it before QE. This will be a very slow process, and I’m speculating here, but it seems the Fed is preparing to drain reserves via QT to get back to scarce reserves, years from now, very slowly. I started reporting on this path in July 2021, when it revived its SRF, which Bernanke had shut down in 2009.
Thanks for the very indepth and useful reply.
However a couple of follow up questions.
Even with the FED doing QT slowly, does not the monthly government deficit of 100 Bill or more USD also start eating away at reserves and other reservoirs of liquidity?
Also the dollars rally would probably make foreigners sellers of us government debt either directly, to defend their currencies, or indirectly by raising interest rates and performing QT of their own, which might require them to start selling foreign reserves.
Am I misreading something , when I believe that much higher interest rates are imminent?
Meanwhile, on the other side of our planet:
“ “If the yen falls further towards 160 per dollar, the BOJ will face even more pressure to raise rates next month.”
This differential stuff is causing volatility to explode for next month, adding to nervous uncertainty and confusion about how the Santa Claus rally will play out as it swirls around faster and faster, as clouds grow darker and thunder grows louder.
My bet is in the deficit growing.
From my guru:
“The Fed swaps market is currently pricing in just one rate cut for next year, with the odds of more than two cuts essentially at zero”
Mkt expectations were insane and the euphoria for next year is way overdone on everything related to the election rally
The fed should just officially change from being “data dependent” to “vibes dependent.” Presto, full flexibility!
The Fed used to be shrouded in secrecy, didn’t release any information, didn’t even announce the decisions of its interest rate meetings, and no one knew whether it hiked or cut. It came down to people guessing by looking in which hand Greenspan held his briefcase, whether the Fed hiked or cut. Those were the good old days, my God how I miss them!! Not.
1:04 PM 12/19/2024
Dow 42,342.24 15.37 0.04%
S&P 500 5,867.08 -5.08 -0.09%
Nasdaq 19,372.77 -19.92 -0.10%
VIX 24.09 -3.53 -12.78%
Gold 2,609.20 -44.10 -1.66%
Oil 69.85 -0.73 -1.03%
MW: Traders brace for volatility with a record $6.6 trillion in options due to expire in Friday’s ‘triple witching’