To the surprise of no one, the Fed cut rates yesterday…
The looming prospect of stagflation…
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Dear Reader,
To the possible surprise of someone… in some distant somewhere… the Federal Reserve reduced its target rate yesterday.
A 25-basis point reduction it was.
Freshly installed Federal Reserve Governor Stephen Miran — a Trump appointee — offered the sole dissent.
Yet has not the president long hollered for a rate reduction?
He has — as has Mr. Miran.
Yesterday the latter declared for a 50-basis point hacksawing.
He believed the 25-basis point pinprick was inadequate to needs.
Two More Rate Cuts This Year?
Will this be the year’s sole rate reduction?
Evidently not. The Federal Reserve itself telegraphed anticipations of two additional reductions this year.
Mr. Simon Dangoor of Goldman Sachs Asset Management:
A majority of the FOMC is now targeting two further cuts this year, indicating that the doves on the committee are now in the driver’s seat. We think it would take a significant upside surprise in inflation or labor market rebound to take the Fed off its current easing trajectory.
What of Mr. Powell himself? What did the mumbling statue have to say?
“Risk Management”
He labelled yesterday’s rate reduction an exercise in “risk management.” More:
While the unemployment rate remains low, it has edged up. Job gains have slowed, and downside risks to employment have risen. At the same time, inflation has risen recently and remains somewhat elevated.
In light of our goals and the shift in the balance of risks, today the Federal Open Market Committee decided to lower our policy interest rate by a quarter percentage point.
The chairman continues in the same predictable tone.
I could continue with his mummeries — yet a faint flicker of human mercy remains within me yet — and so I spare you.
Know merely that the fellow talked much… and said little… as is his wont.
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The Fed’s in a Pickle
The unspoken reality is that the Federal Reserve has wedged itself within a pickle jar.
If it continues rate reductions, it tells itself, it will fortify the labor market. Yet it would permit inflation to continue waltzing.
I would remind you that consumer price inflation accelerated last month.
And if the Federal Reserve halts rate reductions?
It may keep inflation somewhat tethered — yet at the labor market’s expense.
I do not believe the Federal Reserve’s false tricks will fortify the labor market whatsoever.
Yet the Federal Reserve believes it.
Hence yesterday’s foray into “risk management.”
Powell Disappoints Wall Street
How did Wall Street take to the rate reduction?
Its response was… mixed.
It had already anticipated the 25-basis point rate reduction.
Yet it had yearned for intimations of aggressive Federal Reserve softening.
It got instead timid and tepid talk of risk management.
Thus — while the Industrial Jones Industrial Average leapt a jaunty 260 points yesterday — both the S&P 500 and Nasdaq Composite went backwards.
The Good and the Bad
CNBC, by way of summary:
The Federal Reserve lowered its benchmark rate as expected on Wednesday. Fed Chairman Jerome Powell tempered enthusiasm a bit by signaling the move was not the start of a long rate-lowering cycle.
Shares of high-flying tech stocks led the losses following the Fed decision as investors took profits on the bull market winners. Nvidia, Oracle, Palantir and Broadcom each closed lower.
On the positive side, stocks that would benefit from lower rates were in the green, boosting the Dow and the broader market. Shares of Walmart, JPMorgan and American Express were higher during the session.
Gold, meantime, took a $30 stagger yesterday. Oil jogged in place while yields on the 10-year Treasury note drifted higher — to 4.087%.
What can you expect next?
One possible answer is the dreaded stagflation — a ghastly portmanteau of stagnation and inflation.
The Signs of Stagnation Are Present
The Federal Reserve’s gaudy monetary cheapjack will do little to fortify the labor market.
Yet it will facilitate the continuation and possible expansion of inflation.
Thus stagflation. Fortune:
Key indicators point toward the emergence of stagflation — a toxic mix of sluggish growth and elevated prices. Recent government reports showed consumer prices increased by 0.4% in August, pushing annual inflation to 2.9%, the highest since January.
At the same time, initial unemployment claims surged to their highest level in four years, with about 263,000 people filing for benefits in the first week of September. Job growth averages have slowed to just 35,000 per month over the last quarter, down from 168,000 per month in 2024. Unemployment has crept up to 4.3%, also the highest in years and another worrying sign for household finances…
Cutting rates too aggressively could reignite inflation, while keeping them high risks deepening the economic slowdown.
I am far from the confident Mr. Powell is equal to the mounting challenge before him.
And I do not envy his precarious position atop the Federal Reserve.
The president has previously shouted for his resignation.
For his own sake… perhaps the chairman should yield to the president’s demands.
In private moments, in the silent watches of the night, he must certainly mumble to himself:
“Let this be someone else’s headache.”
Regards,
Brian Maher
for Freedom Financial News
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