Common Sense Dictates the Fed will Cut Fed Funds in May
After correctly calling for the Fed to cut the Fed Funds Rate by 50 bps in September 2024, I highly anticipate a 25bp cut in the Fed Funds rate in May.
After 30 years in the financial markets and studying economics and the global financial system, every ounce of rational monetary policy theory in my body says the Fed should unanimously cut rates by 25 bps and an additional 75 bps this year at a minimum.
The Fed Funds Rate is at one of the most restrictive stances that we have had in the history of the US. Annual CPI is now at 2.1%. Neutral Fed policy typically has the Fed Funds rate at or about the same level as inflation. Currently Fed Funds is 4.5%. That’s over 2% higher than normal. Extremely restrictive.
The last time the CPI was at a similar level was in March 2021. Fed Funds was basically zero and just starting the Fed Funds raising cycle.
Not only do you have the lowest annual inflation since 2021, but you have asset deflation as well. Most commodities are lower and oil is at the lowest since March 2021 as well (and headed much lower). Major equity indices have fallen 10%-15%, job market hiring has stalled and the first quarter GDP is negative. Add this to a negative media trying to hurt the president and it doesn’t take much to push confidence off a cliff.
If I gave u all these indications of a struggling economy that can be tipped into a deep recession, you would think the Fed was on a quick and decisive easing campaign putting Fed Funds into accommodative mode.
Didn’t we learn that being behind the curve with all the unknown imbedded risks in the economy can lead to a very difficult recovery once growth turns negative?
Sure, I get it, we need justification not just to lower interest rates but to buy our own debt - there is just too much government debt out there and not enough demand for the upcoming issuance calendar. A good recession or fear of a recession drives people out of equities and into bonds which sounds like it helps - as long as the fear is temporary. And having a central bank purchase government debt without a crisis stinks too much of just printing money. A dollar crisis needs to be avoided at all costs. But our overnight rate is just too high – even compared to other developed nations. The ECB is now at 2% - or close to neutral.
I believe the Fed does not want to appear political with their decisions. But the fundamentals are so glaringly obvious its irresponsible to not take the Fed Funds rate out of such a restrictive stance.
Even if the Fed lowers the Funds Rate in 4 quarter point moves this and next year, they arguable are still restrictive. With conditions moving south quickly and with monetary policy impact taking 6 months or longer to materialize, the Fed is well behind the curve. If they pass up a 25 bps cut this meeting, there will be a couple 50 bps cuts in the near future to pay for their monetary policy sins.
But if the Fed’s intention is to bring rates back down to zero and purchase trillions of the 9 trillion maturing Treasury securities this year in hopes of funding the government and avoiding a default on the 37 trillion of debt, then sell your risk assets and sit back. History, or common sense, shows this won’t end well.
by Michael Carino, Greenwich Endeavors, 4-30-2024
Michael Carino, CEO of Greenwich Endeavors, is a finance specialist with over 30 years of experience. He has owned financial firms with roles including portfolio manager, trader, accountant, risk manager and treasury manager. He typically has positions that benefit from a normalized bond market, higher yields and value investments.