I’m not much for stating the self-evident. It seems like a waste of time. Mine and, more importantly, yours.
But I’ve learned over nearly a decade writing for public consumption that what’s self-evident to me isn’t always self-evident to everyone else, and vice versa. If everyone else refrained from stating what’s self-evident to them, I’d be worse off for it, so I reckon it’s probably true in the other direction.
With that in mind, here’s something that’s self-evident to me: The fate of the S&P rally as the Fed gears up to resume rate-cutting hinges entirely on the fate of the US economy.
Again, that seems so obvious as to be not worth mentioning, but there’s some nuance, if that’s the right word: The whole point of resuming rate cuts is to sustain the expansion, so the chart below’s worth highlighting for the extent to which it suggests that when the Fed resumes cutting after a six-month hiatus, policymakers only succeed about half the time in prolonging the cycle.
“During the last 40 years there have been eight episodes in which the Fed cut after being on hold for six or more months,” Goldman’s David Kostin remarked, in a new note. “The S&P 500 generated a median six-month return of just 2% across all eight of these episodes but rose by a median of 7% in the four episodes during which the economy continued to grow.”
As you can see from the visual, history suggests the S&P will fall by 10% or more in the event the Fed doesn’t succeed this time around in forestalling a downturn — if Jerome Powell’s “too late,” as Donald Trump insists at least four or five times a week.
Minutes from the June FOMC meeting released on Wednesday said “a couple” of policymakers are open to a cut later this month. We know Chris Waller and Miki Bowman would support such a move, and we also know that if he were Fed Chair right now, Kevin Warsh would almost surely be cutting too.
“Economic growth in the US is poised to boom, but it’s being held down by bad economic policies coming from the central bank,” Warsh, who’s in the running to replace Powell, told Larry Kudlow on Tuesday, during a farcical interview on Fox. “Tariffs are not inflationary,” he went on, adding that it’s time for “regime change” at the Fed.
If you look at the FRED chart for the Federal Funds Effective Rate going back to 1955, prior to 2000, the Fed only seemed to cut rates in earnest after the actual start of a recession. (Perhaps at the time they did not know that an “official” recession had begun, but the pattern is quite clear.) My guess is that it was purely reactionary, and therefore usually after the fact. Since 2000, they seem to have begun cutting on the eve of every recession, perhaps in a more predictive manner. With the possible exception of 1984, I see no examples of where the FED drastically cut rates and managed to completely avoid a recession. Perhaps the market can continue to climb, but the outlook for the greater economy may not be so rosy.
https://fred.stlouisfed.org/series/fedfunds
Warsh wants the job and is changing his tune to get it. What happened to Warsh the hawk? The other Kevin is doing the same and based on his public appearances does not appear terribly sharp. In other words, perfect for an appointment to chairman of the FOMC by our stable genius.
Waller would be the smart choice.
This is very interesting. There is also another story you could talk about: what cutting when the market is a month within record highs does. The so called “insurance cut”.
Regime change maybe, but not at the Fed. Powell is the only sentient adult in Washington. Our very own Erdogon wants him out because he wants to blame all the mistakes he’s about to make on Powell.