Next week’s Fed policy meeting is front and center

Outlook

Next week’s Fed policy meeting is front and center. As the Reuters chart yesterday showed, there is “room” for a bigger cut. The FT story that revived the 50 bp narrative is not unreasonable 

Reasons for 50 include getting more quickly to the neutral rate, whatever the hell that is. It would protect the labor market (really?). It’s a remedy for having waited too long, if the Fed decides it had waited too long. It would favor the soft landing. One argument against 50 (of several) is that Trump issued one of his black warnings about the Fed not cutting in September. Amid all the noise, we missed that one.

But a Bloomberg survey of 46 economists finds only a small minority see more than 75 bp this calendar year, starting with 25 bp next week. “Just a few of the economists surveyed expect a larger half-point reduction at either the central bank’s November or December meeting, according to the poll conducted Sept. 6-11.”

The Fed will, however, incorporate more rate cuts into coming years into their forecasts. “The median projection will likely show interest rates in a range of 3.5%-3.75% by the end of next year and 2.75%-3% by the end of 2026.”

And over 75% see continuing GDP growth over the next 12 months. Having said that, there is no consensus on the inflation forecast, meaning they are all two-handed economists.

As we have noted before: no to 50 bp. It would be an acknowledgement of having gone too far, embarrassing the Fed, and it would signal the Fed is panicking, presumably about a projected rise in unemployment. Besides, the inflation data is still not secure.

Tidbit: Reuters features the giant rise in gold, up 24% so far this year. and a record high. It’s not only the expected drop in interest rates that makes gold less unattractive, but also demand of unknown reasons from individuals and some hedge funds, plus central banks around the world (not just China). “Exchange-traded funds have recorded positive inflows for four straight months to the end of August after years of almost unmitigated outflows.” Our theory is that gold and bitcoin are favored because people lack confidence in governments to prevent war (Taiwan, Iran, et al.).

Tidbit: Yesterday mortgage rates fell to 6.2% for the standard 30-year fixed, the lowest since April 2023, down from 6.35% the week before.

Pity those who can’t afford to buy. The Census Bureau’s American Community Survey, released yesterday but mysteriously dated 2023, says “The cost of rent and utilities in 2023 rose faster than home values for the first time in a decade, the latest sign that a distorted housing market has pushed more people into renting.

“… From 2011 to 2019, real rent costs rose less than 3 percent every year, the data shows. In 2022, after peaking during the coronavirus pandemic, rent grew 1 percent. But last year, rent rose 3.8 percent, compared with a 1.8 percent rise in inflation-adjusted median home values.” (Washington Post)

Forecast

The 50 bp thesis may have some traction among some, but not fully convincing and not embraced by the majority of economists. To be fair, sometimes market players are more prescient than economists.

Still, it’s not likely the Fed goes for a 50 bp cut next week, and therefore the dollar “should” resume its recovery trajectory. We will have to wait for the next PCE reading to validate or refute the “100 bp by Christmas” positioning.

Hardly anyone is referring to the upcoming other central bank meetings, specifically the BoE and BoJ. Both are expected to sit on their hands this time and defer cuts to later in the year, although we are not so sure. The BoE now had shinier economic data and the BoJ has to be unhappy about the yen returning to the 140’s.

Political Tidbit: At mid-afternoon yesterday, PredictIt had Harris winning the election at 57¢ to Trump’s 48¢, meaning Trump is more of a long-shot.  Somewhat confusingly, will a woman be the next president gets 55¢, will Harris be the 47th president gets 55¢ vs. 45¢ for Trump, and the Dems win the presidential election gets 57¢ vs. 45¢ for the Republicans. We admit to not understanding betting…

Something else of note—cable TV chose to stay on the Trump lies about Haitians eating cats and dogs in Ohio, at heart just plain racist. After the debate, VP candidate Vance amplified the insult by saying the immigrants are taking geese, too (to a CNN reporter). We can’t wait to see the cartoons. The anti-Trump bias on cable news can’t be missed, but you can’t blame them—this is too funny to by-pass.

The Washington Post headlines that Congressional Republicans are hiding under their desks. The WSJ has an op-ed by famous Republican strategist Rove (“Bush’s Brain”) dumping all over Trump for a “catastrophic” debate and listing each of his faults and failings. The worst: “Trump called Harris ‘dumb as a rock.’ What does that make him?”

The stature of Rove and the significance of the story placement (the WSJ, for heaven’s sake) got the story repeated in many, many other outlets. Ah, they are turning on him. 

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