Expect Fed Baby Step Cuts Followed by Shock and Awe Panic

-edited

The Fed has convinced the market that baby step cuts are the order of the day even as the yield curve screams for more.

Heading into the July 31 FOMC meeting, there was a substantial 22% chance of a 50 basis point cut. Odds of a 50 basis point cut hit 50% at one point.

That speculation ended, for now, when Fed Chair Jerome Powell labeled the rate cut a "Mid-Cycle" Adjustment

In response, the yield curve inverted more, then more still on poor economic data.

Despite a Global Manufacturing Recession made worse by Trump's China tariffs and despite a Bond Market Screaming for More Rate Cuts, traders believe the Fed will take baby steps.

Rate Hike Odds For December

Curiously, traders believe odds of a double cut and no cut are about equally likely.

One side is very wrong most likely, it's those who believe no more cuts.

Eventually the Fed will panic, and I suspect by the end of the year.

Mike "Mish" Shedlock

Comments (9)
No. 1-7
Bam_Man
Bam_Man

You are probably correct. In terms of timing, maybe a little early. I suspect 2Q2020 will be when the real panic response is unleashed. Should make for an interesting election season.

Casual_Observer
Casual_Observer

2020 is going be utter chaos. I suspect we see an undecided election in a recession and civil unrest in America. It feels like its almost baked in like 2007 and 2008.

Bronco
Bronco

"Expect Fed Baby Step Cuts Followed by Shock and Awe Panic"

...

Going going ... GONE.

Mish, you hit that one out of the park.

Tater-Man
Tater-Man

The Fed seems to already be in awe of how ineffectual their rate cut was, and they are in a total panic that they have no credibility left to further manipulate financial markets.

Mish is probably right that the Fed has a proverbial hammer, and everything looks like grounds for a rate cut. But panic is already setting in. Everyone knows the rate cuts won't solve anything, and will in fact make things much much worse.

I expect General (Jerry) Powell to fight and lose the last war anyway, because he has no clue what to do next.

I disagree that the sky will start falling across the board. Entities that rely on ever increasing debt levels are in trouble; entities that have revolving credit needs (this means they pay debt back each cycle) are doing well.

The media will obsess about the debt addicts, and there will be endless whining about how the debt addicts are suffering as a result of their own choices.

Tater-Man
Tater-Man

In addition to the debt addicts, the city that basically lives off IPO money -- I am talking about San Fransisco of course -- should be the most worried of all.

Wall Street knows where DeBlasio's policies lead, so traders are already on the phone with the moving company.

Bloomberg (both the man and the company) must be worried too. The list of companies shutting trading floors (deutche bank, BNP, SocGen, RBS, etc) reads like Bloomberg's largest customer list.

In Japan, entities that were/are levered to financial repression have been slowly circling the drain, as QE/ZIRP failed in spite of its political appeal. Zombie companies propped up by Bank of Japan took their whole industries down.

But also in Japan, entities that were not dependent on endless central bank subsidies are doing just fine.

Curiously enough, many Chinese economists have been arguing in the South China Morning Post that China should emulate this second group. Let Chinese state owned enterprises fail, and (they argue) China will emerge from the trade war stronger than the USA. SCMP is published by Jack Ma, communist party member -- meaning those economists aren't speaking against Beijing.