It’s Clear Now That the Fed Jumped the Gun With Rate Cuts
2024 has unfolded as a tumultuous year for the Federal Reserve, characterized by indecision and erratic rate cuts that leave many questioning their responsiveness to actual economic conditions. The once revered institution has devolved into a mere spectator, scrambling to interpret data and reacting to the market’s whims. What a contrast to the good old days when monetary policy was dictated by solid economic principles rather than the latest headlines or political pressures.
A Year of Volatility and Uncertainty
This year began with expectations of 150 basis points in rate cuts, only to witness a reversal as the economy exhibited unexpected strength in the first half. However, by summer’s end, the bond market sounded alarm bells, signaling an imminent slowdown in manufacturing and reinforcing recessionary fears. The Fed’s apparent reliance on “data dependence” has led it to a precipice, chasing a narrative that has consistently eluded them.
In what can only be described as a panic move, the Fed opted for a **50 basis point cut** during the October Federal Open Market Committee (FOMC) meeting—a full month before the presidential election. The dangerous dance they found themselves in can only be interpreted as a precarious balancing act; damned if they cut and damned if they don’t. Their decision to further hint at another potential cut left the bond market in a paradox of expectation versus reality.
The Bond Market’s Reaction
Post-meeting, rather shockingly, the bond market reacted by shedding gains, sending yields on the 10-year note soaring from lows of 3.5% to 4.09%. This is a clear indication that the market is viewing the Fed’s dovish stance with skepticism. **Not even a perceived decrease in interest rates has bolstered credibility in central banking**—a striking observation when one considers their self-stated commitment to combatting inflation.
The Inflation Reality Check
Despite CPI showing some signs of moderation, averaging 2.9% to 3.2%, the Fed remains deluded if they believe they can safely cut rates. A deeper dive into the **super core services CPI** underscores that inflation remains persistently high, ticking over 4%. Cutting rates under these circumstances only feeds a **Goldilocks economy**, one that could ultimately backfire if inflation expectations spiral out of control again. How can the Fed maintain both the narrative of a soft landing and a bond market pricing in a full 200 basis points of cuts? It simply cannot.
Market Discontent
Since the FOMC meeting, bond market sentiments have shifted again but the equity market seems to cling to the idea that further cuts are not just probable but inevitable. Retail sales figures released recently paint a more optimistic picture. U.S. retail sales increased by **0.4%**, edging out expectations, while retail sales excluding auto surged by **0.5%**. With the biggest positive September seasonal adjustment recorded, one must wonder how this narrative intertwines with upcoming elections, but we must take the data at face value.
The State of the Labor Market
Initially spurred by recent disruptive storms and strikes, initial jobless claims have dipped back down from a revised **260,000** to **241,000**. This indicates resilience in the labor market, defying the Fed’s fear-infused narrative that job losses were imminent. This backdrop raises the question: why is the Fed so intent on initiating further cuts? Claims of being apolitical ring hollow when pressure surfaces from figures like Nancy Pelosi, underscoring the political dimensions entangling monetary policy.
Time to Reassess Monetary Policy
The Fed’s mantra of “more work needs to be done” starkly contrasts the decision to cut rates. As the dollar strengthens, and as the bond market begins to price out these anticipated cuts, the equity market will eventually have to recalibrate its expectations. The days of negative interest rates belong to a bygone era—those fond stories meant to entertain our grandchildren about the age of easy money are waning fast. We are witness to a fundamental readjustment within the American economy, one that will force long-term market players to accept a permanently higher cost of capital.
Ultimately, it is clear that the Fed has jumped the gun on rate cuts—an error that could have dire consequences for the economy and its credibility. We must stay vigilant in these evolving conditions, underscoring the need for responsible, traditional financial principles to guide our path forward.