Headline:
50 Basis Point Fed Funds Cut Challenged By Markets.
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Since The Federal Reserve Reduced Interest Rates By 50 Basis Points On 9.18.24…
An Odd Confluence Of Price Action Ripples Through The U.S. Bond + Currency Markets.
The U.S. Dollar Has Launched Higher + Long Rates Have Ramped…Resulting In Much 10 Year Bond Price Degradation[See Above]…
Resulting In A Bear Steepening Of The Yield Curve…
As The Majority Of Economic Data [Prior/Definitely Subsequent To 9.18.24]…
Remains Broadly Firm…Especially The Labor Market.
Plus…Forthcoming Q3 GDP Will Likely Print With A Strong “3” Handle.
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Nevertheless…U.S. Manufacturing Data Remains Weak…
But Despite Dramatic Media Headlines = Only Contributes 10.5% Of U.S. GDP.
Thus A Statistically Minimal Economic Impact.
So The U.S. Manufacturing Economy Is Not A Large Risk To Both Fed Mandates = Employment + Inflation.
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In Contrast…The U.S. Services Economy = 79% Of U.S. GDP [7.5x The Economic Impact Of Manufacturing]…
Continues To Run Red Hot…
Which Is Somewhat Troublesome For The Fed’s Employment Mandate…
But Much More Problematic For Their Inflation Mandate…
As The Most Recent CPI Report [See Below] Indicates Year/Year Service Inflation + It’s Sub-Components…
Still Running Well Above The Fed’s Inflation Target Of 2% [See Below…Bottom 4 Line Items].
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Thus…The 10.10.24 CPI Services Data Certainly Help Explain The Post 9.18.24 Price Action In Both The U.S. Dollar + Bond Markets.
Some Price Dynamic Was Likely A “Give-Back” To The Rally Preceding The Well Signaled September Rate Cut…
Though The Magnitude Of The Rate Cut…25 Basis Points vs. 50 Basis Points…Was Widely Considered A Toss-Up.
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However Now = A Full-Fledged Rout In Longer Dated Bonds + A Furious Rally In The U.S. Dollar Has Concurrently Unfolded…
Indicating Market Actors Are Increasingly Un-Convinced By The FOMC’s September Statement =
“The Committee Has Gained Greater Confidence That Inflation Is Moving Sustainably Toward 2 Percent.”
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Further + Oddly…Until August ’24’s Jackson Hole Monetary Conference…
Service Inflation Measures Were An Especially Focused Marker For Powell’s Fed…
But It Seems No More…
As Despite Consistently Solid Employment Data [Jobless Claims + JOLTS + Unemployment]…
The Fed Publicly Communicates A Fresh Concern About A Potentially Weakening Labor Market.
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So…For Now…The Fed Has “A Lot Of Egg On It’s Face“…
And Once Again…Markets Question The Fed’s Credibility…
As The Price Action In The Bond + Currency Markets = The Opposite Of What The Fed Intended On 9.18.24…
Which Was/Is =
A Bull Steepening Yield Curve + An Offered Dollar.
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Of Course…Most Recent Comments By Fed Governor’s/Presidents…
Conveniently Backpedal On Future Rate Cut Paths…
Just 1 Month After Codifying Their Interest Rate Forecasts In Their Quarterly Dot Plot.
No Doubt…Central Banking = Humbling + Tough Job…
Requiring A Keen Intellect + Judicious Communication Skills + Market Savvy.
Still…Frequent Flucuations In Most Fed Officials Economic Outlooks…
Whether The Dot Plot Or Public Commentary Distinctly Indicate…
They’ve No Crystal Ball To The Economic Future…
Anymore Than Most Competent + Sophisticated Market Participants.
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Finally…At This Point In Time…The Only Factor In The Fed’s Favor…
After Their Apparent Policy Mistake =
Recently Spiking Intermediate/Long Term Interet Rates + A Firmer Dollar Ought To…
Marginally Weigh On Inflation.
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