Fed Baby Steps Coming: What's Powell Up To?


The odds of a double rate cut in September plunged from 40% recently to 31% last week then to 0% today.

Bond Market Screaming for Cuts

Yield Synopsis

  • Despite a yield rally on the 30-year bond from 1.98% to 2.10% the yield curve is still inverted out to 30 years.
  • The 2s10s inverted again today.
  • The 5sFF inversion is a whopping 62.5 basis points.

Effectively, the bond market is screaming for fast, deep cuts. Yet the CME Fedwatch chart shows that traders have thrown in the towel on big, fast cuts.

What Happened?

The Fed effectively jawboned expectations of cuts lower.

Lot More Going On

Negative Rates Damage Banks

Screwing Up the Economy

Wolf Richter explains How Negative Interest Rates Screw Up the Economy.

Divided Fed

The New York Times reports Fed Was Divided About Interest Rate Cut

Federal Reserve officials were sharply divided when they voted to cut interest rates for the first time in a decade in late July, newly released minutes from their meeting show.

Notes from the gathering, released Wednesday, show that “a couple” of participants at the meeting — not all of whom get to vote on monetary policy — would have preferred a half-point cut in the federal funds rate to shore up inflation.

But “several” wanted to hold rates steady, noting a strong job market and low unemployment. Two Fed officials voted against the decision to cut.

What's Going On Follow Up

Let's return to Randy Woodward's observation "I think there's a lot more going on than just rate hikes. Sooner or later he's going to make it clear he wants to have the ability to go negative."

I agree wholeheartedly with Woodward's first sentence. The second sentence is debatable.

The Fed is in many ways clueless. They will never see themselves as being any part of the problem.

But But But

Please note the policy difference between the Fed and the ECB.

  1. The Fed paid interest on excess reserves, thereby bailing out US banks slowly over time.
  2. The ECB with negative interest rates further crushed European banks

I have commented on that aspect many times.

Wolf Richter and Daniel Lacalle made similar observations.

Compared to the ECB the Fed Isn't Clueless

No matter how one slices things, the Fed's actions have been less damaging than the ECB's.

The Fed cannot come out and blame the ECB for stupidity, but it can attempt to jawbone expectations of big cuts lower, even as the ECB is touting more and more intervention.

What good did negative interest rates do for either Japan or the ECB?

Reflections on Errors

It's easier to spot the errors of others than the errors you make.

It's possible that at least some Fed members see the damage of the ECB's actions.

If so, the correct Fed response is "baby steps".

With a bit of poetic license, I have a musical tribute.

Baby Steps, You Make Those Cutest Little Baby Steps

Hussman Gets the Picture

Making Sense of It All

Hussman's Tweet provides is a short synopsis of the idea I presented in detail in Making Sense of 100-Yr Bonds yielding 0% and 30-Yr Bonds With Negative Yield.

Without central bank manipulation fraud, negative interest interest rates wouldn't happen.

Perhaps I am giving credit where none is due. But perhaps some Fed members see the damage that negative rates cause even if they cannot explicitly say so.

Mike "Mish" Shedlock

Comments (24)
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Tony Bennett
Tony Bennett

"Sooner or later he's going to make it clear he wants to have the ability to go negative."



Greenspan last week start of 'paving the way' operation for going negative.


I think the long end of the US yield curve is distorted by the EU rates. The long end is impacted by supply and demand. I don't think the yield curve is a good forecast method due to this. Again, here is a good quote from Kyle Bass “We’re the only country that has an integer in front of our bond yields,” “We have 90% of the world’s investment-grade debt. We actually have rule of law and we have a decent economy. All the money is going to come here.”


I don't see this doing anything other than causing people to become more cautious (may not be a bad thing) but bringing about the very thing it's intended to avoid.

Slowdown, recession, finally stagflation and/or depression.

Not only that but once through zero, where is the next natural boundary? I don't see one. In a ridiculous world why not -5% as a possibility.


I'd like to see Powell announce that, pursuant to carrying out the Fed's dual mandate by congress of full employment and price stability, the Fed is establishing a sinking fund to defray the $8.2 Billion per day of deficit spending currently being predicted by the CBO and an eventually obvious mortal threat to price stability. Interest rates will be set at whatever level required to attract sufficient global capital to accomplish this vital objective. Your move, congress.


The edit function is still not working. I caught my egregious $8.2 Billion per day mistake and tried to correct it to only $2.7 Billion per day, but to no avail. I'd like to further aid the back-to-solvency effort by suggesting the sinking fund be officially named, The Congressional Prolificacy Fund, CPF for short. You're welcome.