The Fed meets on July 31 to make an interest rate policy decision. What should the Fed do?

chart

 

Jim Bianco at Bianco Research says Only a Half-Point Rate Cut From the Fed Will Do.

"Anything less would fail to fix the imbalances in the global bond market, continuing to weigh on economic sentiment," says Bianco.

"By lowering its target for the federal funds rate by just a quarter point, the Fed risks no less than a recession. The Fed has a history of moving too slow to respond to evidence of weaker growth, and a bold move now would help ensure the economy achieves the rare soft landing.”

I stand corrected. With his charts, I concede that Bianco made a solid case for cuts.

Yet, his charts highlight something more important.

Fed's Asymmetric Bubble-Blowing Policy 1992-Present

chart

 

Chart courtesy of Bianco. The title and blue boxes are my anecdotes.

Bianco notes "In the 1990s the fed funds contracts only went out 6 months. That is why the lines are short. In the 2000s they went out a year, lines are a little longer. Around 2007 they started going out three years, the longest lines."

Each calendar years is a different color.

So the yellow to the upper right is 2018 (each month end … so Jan 31, Feb 28 and so on, the forward curve projected up to 2021. Black, in a downtrend, is 2009)

Let's hone in on the period starting 2009.

Fed's Asymmetric Bubble-Blowing Policy 2009-Present

chart

 

Market Screaming for Hikes

The market was screaming for hikes for five years.

The Fed did not deliver.

Too Low, Too Long

That the Fed did not deliver hikes as expected is part of its asymmetric policy of keeping interest rates too low, too long,

Bubbles Blown

Without a doubt the Fed blew more bubbles, and likely the biggest in history.

The market responded with a prolonged yield-curve inversion.

Yield Curve

chart

 

Spread

  • The effective Fed Fund Rate is currently 2.41%.

  • The yield on the three-year Treasury Note is 1.80%.

  • The spread is -0.61 percentage points

Behind the Curve

Bianco is correct. The Fed is behind the curve.

And by his logic it's not clear that 50 basis points is enough of a cut.

But to what avail?

So What? Bubbles Already Blown

Let's return to Bianco's opening gambit: "Anything less would fail to fix the imbalances in the global bond market, continuing to weigh on economic sentiment."

On July 18, I wrote Half-Point Rate Cut Odds Explode to 71% - So What? It Doesn't Matter!

The Fed, with its asymmetric too-low too-long policy blew bubbles that are impossible to fix.

Too Late for Insurance

Rate cuts now as economic insurance is like trying to buy insurance on your car after you wrecked it.

The bubbles have been blown.

Even if the Fed can correct current "imbalances" it cannot "unblow" bubbles anymore than it can unblow a horn.

Deflationary Bust Baked in the Cake

In the Fed's foolish attempt to stave off consumer price deflation, the Fed sowed the seeds of a very destructive set of asset bubbles in junk bonds, housing, and the stock market.

The widely discussed "everything bubble" is, in reality, a corporate junk bond bubble on steroids sponsored by the Fed.

Rate Cuts Don't Matter

The bottom line at this point is an economic recession is baked in the cake. The global economy is slowing and the US will not be immune.

The debt deflation horn has already sounded.It will not be unblown no matter how big the cut.

This material is based upon information that Sitka Pacific Capital Management considers reliable and endeavors to keep current, Sitka Pacific Capital Management does not assure that this material is accurate, current or complete, and it should not be relied upon as such.

Analysis feed

Latest Forex Analysis

Editors’ Picks

GBP/USD advances above 1.30 after upbeat UK wage figures

GBP/USD is trading above 1.30 after UK wage figures beat expectations with 3.2% annually. The unemployment rate remained at 3.8% in November. 

GBP/USD News

EUR/USD trades around 1.11 amid upbeat German figures, trade headlines

EUR/USD is trading around 1.11 after the German ZEW Economic Sentiment beat with 26.7 points. Presidents Trump and Macron agreed not to slap tariffs on each others' countries.

EUR/USD News

Market delays the trip to the moon

The crypto markets continue to turn to a new bullish phase. This turnaround began at the beginning of the year after a consolidation phase that started in mid-2019. 

Read more

Gold retreats from 2-week tops, drifts into negative territory

Gold failed to capitalize on its early uptick to near two-week tops and dropped to fresh session lows, around the $1560 region in the last hour.

Gold News

USD/JPY: Weaker near 110.00 amid China virus fears, BOJ's status-quo

The Japanese yen retains the bid tone following the Bank of Japan's (BOJ) status-quo, keeping USD/JPY under pressure near the 110 level amid risk-off market profile. S&P 500 futures drop 0.40% while the US Treasury yields are down over 1.50%, as the sentiment is hit by the coronavirus outbreak. 

USD/JPY News

Forex Majors

Cryptocurrencies

Signatures