Half-Point Rate Cut Odds Explode to 71% - So What? It Doesn't Matter!

-edited

The odds of a 50 basis point rate cut on July 31 topped the 70% mark in the wake of a dive in leading indicators.

CME Fedwatch notes a huge jump in the odds of a 50 basis point cut by the Fed on July 31.

This is an edited post. In the hour or so that it took me to write this, the odds jumped from 49% to 71%.

Increasing Odds of 50 BPs Cut

  • Today (one hour ago) 49.3%
  • Now (2:48 PM central) 71.0%
  • Yesterday: 34.3%
  • 1 Week ago: 19.9%
  • 1 Month Ago: 17.9%

Why?

  1. The odds jumped yesterday from the prior week on news Housing Slowly Rolling Over: June Permits Down 6.1%, Starts Down 0.9%
  2. The odds jumped today from yesterday on news Leading Economic Indicators (LEI) Unexpectedly Dive Into Negative Territory

What's Really Happening?

  • Traders are front-running the Fed.
  • History shows the Fed is highly likely to cooperate with what traders want.

That's it in a nutshell.

Four Easy Predictions

  1. Powell gets his name in lights
  2. Trump will praise the rate cuts while saying they may be too late. And if so, the Fed is to blame. Trump will have his scapegoat: Fed chair Jerome Powell.
  3. The market will not like a 25 basis point cut.
  4. The market will not like a 50 basis point cut either, although the initial reaction may be positive. Look for a gap and crap, if not immediately, within a couple days, but I expect the same day.

What About the Insurance Theory?

A number of Fed governors and economic writers want a big cuts for insurance purposes.

These people are economic illiterates.

Too Late for Insurance

Rate cuts now as economic insurance is like trying to buy insurance on your car after you wrecked it.

The bubbles have been blown.

Rate cuts cannot unblow economic bubbles any more than they can unblow a horn.

Rate Cuts Don't Matter

The bottom line at this point is an economic recession is baked in the cake. The global economy is slowing and the US will not be immune.

It's possible the US is in recession already, but consumer spending does not point that way, unless it's revised.

It's all moot.

Fed Deflation Boogeyman

The Fed has been fighting the deflation boogeyman.

Yet, the BIS did a historical study and found routine deflation was not any problem at all.

Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Deflationary Bust Baked in the Cake

In the Fed's foolish attempt to stave off consumer price deflation, the Fed sowed the seeds of a very destructive set of asset bubbles in junk bonds, housing, and the stock market.

The widely discussed "everything bubble" is, in reality, a corporate junk bond bubble on steroids sponsored by the Fed.

For discussion, please see Junk Bond Bubble in Pictures: Deflation Up Next

A 50 or even 100 basis point cut won't matter now.

It's too late to matter. The debt deflation horn has already sounded.

Mike "Mish" Shedlock

Comments (20)
No. 1-16
HubbaBuba2
HubbaBuba2

Fed goes "Lovey Dovey"!

shamrock
shamrock

"Rate cuts cannot unblow economic bubbles any more than they can unblow a horn"

Why would a rate cut deflate a bubble? Rate increases might deflate a bubble but a cut would be intended to keep the bubble afloat.

Bam_Man
Bam_Man

"Gold, bitchezzzz!"

Mish
Mish

Editor

Why would a rate cut deflate a bubble?

It won't It's irrelevant

Curious-Cat
Curious-Cat

Fed goal has nothing to do with deflating bubble. That would cause increase in bancrupty and unemployment which they don't want. I think they hold out hope that decrease will stimulate economy through further debt, which is mafestly nuts.

Greggg
Greggg

We have a lot of confidence in the Fed in our household. That's why we have allocated 50% of our discretionary income into gold and silver. We've done that a few times before, but this time it's different... we are taking delivery this time.

Casual_Observer
Casual_Observer

This isn't about bubbles or the economy. It is about rolling over debt. We need low rates to roll over debt. So do other countries. It isn't a coincidence the 50bps cut may happen the same day there is a debt deal between Treasury and the Congress to increase the debt ceiling.

Bam_Man
Bam_Man

It is glaringly obvious that all the Western Central banks are now trapped in a "race-to-the-bottom" of interest rates and currency values. Prepare yourselves accordingly.

Cocoa
Cocoa

Wuh? Deflation isn't so bad? What? Inflation is the basis for the entire financial system...what is the BIS smoking? Even the FED has to avoid deflation because the system can't run backwards

Six000mileyear
Six000mileyear

Interest rates this low while the stock markets are this high indicates the market is polarized and unstable.

nic9075
nic9075

Let's see jobless claims still in the 210s with continuing claims falling, white hot consumer spending based on weekly chain store reports, hotels and flights anywhere are booked solid, vehicle sales of CUVs and SUVs are white hot with dealers selling out at full sticker MSRP + OPTIONS + FEES + TAXES..., Where exactly is there a recession???

The media and economists downplaying the booming economy. It would be reported totally different if Bill Clinton's wife was president today

Ted R
Ted R

Shedlock has written a perfect article. I agree 100%. Well done.

Mish
Mish

Editor

"Wuh? Deflation isn't so bad? What? Inflation is the basis for the entire financial system...what is the BIS smoking? Even the FED has to avoid deflation because the system can't run backwards"

Read the article. Based on analysis of deflation periods.

It's obvious you didn't

Snow_Dog
Snow_Dog

“A 50 or even 100 basis point cut won't matter now.”

An avalanche of corporate borrowing may be about to be released, all in pursuit of stock buybacks, courtesy of the Federal Reserve System.

They lower until something breaks, then they come to the rescue of the crisis that they created, babbling endlessly along the way about the invisible hand.

TheLege
TheLege

It’s the latter. The next crisis will be the last crisis before reset.