The Fed Throws In The Towel On Rates

As expected, the Federal Reserve joined other central banks around the world in cutting the Federal Funds Rate (FFR). While the cut was expected, the size of the cut was in question but now we know. Fifty basis points (bps), or 0.50%, was the lucky number.

The Federal Reserve is giving you the all clear to stimulate the economy.

Dear reader, do you feel like going on a spending spree now that your credit card rate may drop a a fraction of a percent? Do you feel richer?

If history is any guide, this is unlikely to be the last rate cut. In fact, we will probably see many rate cuts ending when the Fed gets the FFR below the 2-year Treasury rate.

For context, the 2-year Treasury rate currently rests at 3.61%. The FFR target rate is 4.75-5.0% after today’s cut. We will see another 1.5% in cuts assuming the 2-year rate doesn’t fall further, or rise.

“But there is nothing to fear” says the Fed. “The economy is in good shape. We’re just cutting rates because… we can?”

“Never mind that we have not hit our inflation targets. There is nothing to fear!”

Interest rate cuts won’t stop what’s coming because the Fed is little more than a PsyOp, and does not control money, interest rates, or the economy. The Fed is the ultimate confidence man.

But Dirk, didn’t you hear that retail sales were up in August? That means people spent more money so things must be going well, right?

Yes, I did hear that. But what you didn’t hear is that the figure presented to us was nominal retail sales. Figure for inflation, and real retail sales was negative in August and has been mostly negative for the past 2 years.

If people are buying less stuff, is that positive for the economy?

Slowing hiring, negative real retail sales, and dropping interest rates. The “economy is fine” narrative doesn’t pass the sniff test, and if it were food, I’d throw it in the trash.