A Politically Motivated Fed Rate Cut and Election
Uncertainty Threaten the Markets
By the
Curmudgeon with Victor Sperandeo
Introduction:
The CME Fed Watch Tool got it right! Based on Fed Funds futures contracts, the
Tool on Monday forecast a 69% probability of a 50bps rate cut, which was
announced on Wednesday at the conclusion of the FOMC September meeting. Astonishingly, that forecast was up from only
15% on September 12th! We
don’t know what changed in those two trading days to cause futures traders to
bet on a 50 bps Fed Funds rate reduction. Meanwhile, most economists and market
analysts expected only a 25bps rate cut.
Fed officials penciled in a target range of 4.25-4.5%
for its benchmark federal funds rate by the end of this year, which signals two
quarter-point rate cuts or one half-point cut. For 2025, they’re expecting to
cut borrowing costs four more times, bringing their key benchmark interest rate
to 3.25-3.5%.
Let’s examine if a 50-bps rate cut was needed now and
whom it was actually intended to benefit.
You won’t find our analysis anywhere else!
Significance of the 50 bps Fed Rate Cut:
Here’s a historical chart of the Fed Funds rate:
Victor believes this “jumbo” rate cut means little in the near term
economically, but it’s critical to political and market psychology.
The larger-than-expected rate cut signals a more
accommodative monetary policy, which tends to increase risk appetite for
stocks, junk bonds, bitcoin and other “risk-on” investments/speculations. Lower interest rates, combined with a growing
economy, tend to push up the stock market (especially interest rate sensitive
stocks) as investors are enticed to take on more risk when yields on safer
assets decline.
That, in turn, creates a “feel good wealth effect”
which tends to benefit the political party in power, especially in an
election year. The 50-bps rate reduction
also fulfills President Joe Biden’s call that interest rates would come down
during his term in office.
With the November 5th U.S. Presidential
election just six weeks away, the timing and size of the rate cut becomes politically
sensitive. The Fed's actions may soon be scrutinized for potential
influence on the election outcome as we do in this post.
Victor has stated numerous times that the Fed would
cut rates before the November elections to help the Democrats. While Fed Chair
Jerome Powell has said the Fed is independent and not politically motivated,
nothing could be further from the truth.
-->The Fed Is in fact a very political
institution and not independent as Powell has claimed.
Sidebar: Composition of the FOMC:
The Federal Open Market Committee (FOMC) consists
of twelve voting members--the seven members of the Board of Governors of the Federal
Reserve System (appointed by the U.S. president and confirmed by the senate);
the president of the Federal Reserve Bank of New York; and four of the
remaining eleven Reserve Bank presidents, who serve one-year terms on a
rotating basis.
Nonvoting Reserve Bank presidents attend the meetings of the
Committee, participate in the discussions, and contribute to the FOMC’s
assessment of the economy and policy options.
Five of the current FOMC voting members were
appointed by a Democratic President.
Trump appointed Republicans Chris Waller and Michelle Bowman. The latter
was the only FOMC member that did not approve the 50-bps rate cut. It was the first such dissent since 2005!
Comment and Analysis:
The Fed regional bank presidents are in the minority
at the FOMC as the majority of voting members are appointed and confirmed by
the U.S. government.
-->You
can be sure this was the plan to keep control of who determines monetary
policy.
-->Victor believes the U.S. government only
permits Keynesians on the FOMC, not Austrian Classical Free Market thinkers
like Adam Smith, or economists that believe in Monetarism like Milton Friedman.
He says the Fed is the arm of the U.S. government
that is the executor of a “long-term” plan to control the nation to its desires
and values by “printing” fiat money and how it controls credit. Understand
without credit and increases in the money supply the U.S. economy would stop
dead in its tracks.
Did the U.S. Economy Need a 50 bps Rate Cut?
We all know that Fed rate reductions stimulate the
U.S. economy (with a lag effect of several months) by making borrowing cheaper
for businesses and consumers.
The U.S. economy is now growing above trend
(the Atlanta Fed estimates GDP at + 2.9% for the current quarter) and inflation
is significantly above the Fed’s 2% target (the latest 12-month core Personal Consumption Expenditure -PCE- inflation
rate is 2.6% and it increased +0.5% in the last month. The CPI is even higher!).
Also, personal income along with disposable
income continue to rise. Add the 4.2% unemployment rate, which is
among the lowest in history and is considered “full employment.” Finally, The University of the latest Michigan
Consumer Confidence Index is at 69, higher than the final value of 67.9 in
August. The value has risen for two consecutive months, with September’s figure
the highest since May of this year. So how could the Fed
justify a 50bps rate reduction?
Our answer is…………………………………………………………...
Political Persuasion:
1. In a September 16th WSJ op-ed, Michael Toth wrote that
rate cutting in the homestretch of the political season is exceptional and
should not happen. He wrote:
At his nomination hearing in 2017, Mr. Powell promised that
like Ms. Yellen, he would “do everything in my power” to preserve the Fed’s
“independent and nonpartisan status.” If he’s serious about that pledge, he
should hold fast on rate cuts at the September FOMC meeting.
2. If there was a strong case for a 50-bps cut, Fed
Chair Jerome Powell did not make it at Wednesday’s press conference. He
repeatedly stressed that the U.S. economy was strong, and the large rate
cut should be viewed as a commitment to keep it strong.
-->Really? A 50-bps cut as a message that the
economy is strong?
Normally, a significant rate cut is interpreted as a
sign that the Fed is concerned about the health of the economy and worried that
growth is decreasing rapidly.
3. The 50-bps rate cut could spark debates about the
appropriate balance between supporting economic growth and managing inflation,
potentially becoming a talking point in political campaigns.
At Wednesday’s Fed press conference, Powell emphasized
that the Fed did not set any political “filters” when making decisions. He
insisted that the Fed was an “independent institution” and that its decisions
were not influenced by political pressure.
Do you really believe that?
4. Democratic Presidential candidate Kamala Harris
hailed the current rate cut as a boon for middle-class families. Mark Zandi,
chief economist at Moody’s Analytics, told the Washington Post that the rate cut
will certainly provide an economic boost to Harris’ campaign. He said, “The rate cut, which will be the
start of a series of rate cuts, is an economic tailwind behind the Harris
campaign for sure.”
5. Republicans criticized the Fed for cutting rates
as sharply as they did ahead of the election. Stephen Moore, an economic
adviser to Donald Trump, said the decision “seemed unwise” and “was
jaw-dropping.” Trump himself had strong words, slamming the Fed for
cutting rates at this time as politically motivated.
At a campaign event in Manhattan on Thursday, Trump
said that whatever the Fed’s motives, the rate cut was a “very unusual number.”
“I think if they’re not just playing politics, then cutting rates that much
would indicate a very bad economy. Either way, that’s a big rate cut.”
In June of this year, Trump hinted that the Federal
Reserve’s interest rate cuts this fall could be seen as a form of political
interference, “Interest rates are very high right now and it’s hard for
them. I know they want to try to do that. Maybe they’ll do it before the
election, before Nov. 5, even though they know they shouldn’t.”
Trump super donor John Alfred Paulson, founder of
U.S. hedge fund firm Paulson & Co. said the Federal Reserve should “stay
out of presidential politics.” He added, “This decision sidesteps the question
of whether the timing was chosen with the intention of boosting Vice President
Harris’ campaign.”
Uncertain Election Outcomes Will Impact the Markets:
Victor says that U.S. election projections are a key part of
how the markets will react in the next 44 days. There is a huge spectrum of
wild possibilities of what will happen leading up to and after this November’s
Presidential elections (January 20, 2025, is inauguration day).
Here are a few examples if Trump wins the
election:
·
What if Trump is sentenced to
jail on November 26th (after the elections) for his felony
convictions? Trump was convicted in May on 34 counts of falsifying business
records to cover up a hush money payment to an adult-film star alleging an
affair with the former president.
·
As Trump is a convicted
felon, what does a new administration do if the generals in the armed forces
refuse to obey his orders?
·
What if he is assassinated
after the election, but before they count and confirm the electoral votes? Bomb threats and two Trump attempted
assassinations this year have become part of the (deplorable) political landscape.
·
Will JD Vance become the U.S.
president-elect if Trump is assassinated prior to inauguration day on January
25, 2025?
·
Will the election be accepted
by the losing party, or will the decision go to the Supreme Court as it did in 2000
(to resolve the recount dispute in Florida)?
There’s an equal amount of uncertainty if Kamala
wins. To now, she has evaded all inquiries into her proposed policies if she is
elected U.S. president.
In a September 21st WSJ op-ed, Peggy Noonan noted
that Ms. Harris has not clearly disclosed her positions on the key issues
facing the U.S. – the economy, inflation, immigration, wars in Ukraine and the
Middle East (Israel vs Hamas and Hezbollah). Ms. Noonan wrote:
“This
week she (Kamala) couldn’t or wouldn’t answer a single question straight, and
people could see it. She is an artless dodger.”
“Failing
to speak plainly and deeply now about illegal immigration is political
malpractice on a grand scale. There are other large questions. What
philosophical predilection does she bring to taxing, spending, regulation, to
the national debt?”
“She
owes us these answers. It is wrong that she can’t or won’t address them. It is
disrespectful to the electorate.
Therefore, we must conclude that Kamala is an unknown
entity – totally empty. Noonan concluded:
“Empty
means trouble, a blur when we need a rudder, a national gamble based on
insufficient information. It means a policy regime that would be unpredictable,
perhaps extreme. You don’t want that.”
So, the variations are endless with the outcomes
highly uncertain - no matter who wins the November Presidential elections and
which party will control the House and the Senate next year.
For sure, the markets will respond to whether the
U.S. political system remains intact. Any kind of threat to the election
results leads to an uncertain future which will directly impact the markets.
This is why Gold deserves some allocation as a hedge against uncertainty.
Conclusions:
We believe the Fed’s 50-bps rate cut will benefit
Kamala by creating a “feel good, things are getting better” perception among
voters. It will also lower mortgage rates making homes more affordable and
rents cheaper. The downside is that inflation may rise yet again.
Komal Sri-Kumar, president of Sri-Kumar Global
Strategies, an economic consulting firm, cited strong retail sales data as
suggesting there’s a risk that the Fed cuts cause prices to increase. “The
consumer is very strong, and you’re giving him or her more stimulus by cutting
interest rates, which tells me the risk of inflation picking up is very real,”
Sri-Kumar said. “There is a risk of inflation reigniting with a 50-basis-point
cut.”
Also, there has never before been such uncertainty
and unknown outcomes/policies of a U.S. Presidential election in our lifetime.
…………………………………………………………………………………………………………….,
End Quote:
13 years ago, then EU President Jean-Claude Juncker
spoke of how government officials respond to questions they don’t want to
answer. In a debate in 2011, during the height of the eurozone crisis, Juncker
responded to a conference-goer's suggestion to increase the openness of the
strategy discussions in the Eurogroup, by stating:
"When it becomes serious you have to lie!"
Fast forward to the present – does that ring a bell?
………………………………………………………………………………………….
Be well, stay calm, success and good luck. Till next
time...
The
Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
Copyright © 2024 by the Curmudgeon and Marc Sexton. All rights reserved.
Readers are PROHIBITED from duplicating, copying, or reproducing article(s) written by The Curmudgeon and Victor Sperandeo without providing the URL of the original posted article(s).