"Theorie des Geldes" did not become the playbook for policy makers. The 1920s were marked by the brave new era of the Federal Reserve system promoting inflationary credit expansion and with it permanent prosperity. The nerve of this Doubting-Thomas, perma-bear, crazy Kraut! Sadly, poor Ludwig was very nearly alone in warning of the collapse to come from this credit expansion. In mid-1929, he stubbornly turned down a lucrative job offer from the Viennese bank Kreditanstalt, much to the annoyance of his fiancée, proclaiming "A great crash is coming, and I don't want my name in any way connected with it."—Mark Spitznagel
US Federal Reserve Powell’s 50 bps Rate Cut: A Case of Panic or Politics?
Was Federal Reserve’s Jerome Powell’s 50-basis-point rate cut a data-driven economic response, or was it aimed at tilting the presidential election odds in favor of the Democrats?
The U.S. Federal Reserve began its rate-cutting cycle with a surprise 50-basis-point reduction on September 18, 2024.
Figure 1
Historically, or based on the Fed's interest rate cycle, economic recessions or financial panics have often followed the Fed's interest rate cuts, a pattern that has been consistent since the 1970s.
In the present episode, as US stocks have been rocketing to establish back-to-back milestone highs. However, this supposedly presage a "long-term bull market," rather than a temporary spike—anchored on the popular rationale for a forthcoming economic slowdown that would signify a "soft landing."
The spillover effects of the easy money regime have not been limited to the US but global in scale.
Figure 2
US officials could be sugarcoating the current economic conditions. From a labor perspective, unemployment rates inevitably rise after the rate-cutting cycle begins. (Figure 2, upper window)
According to Mises Institute's chief editor Ryan McMaken:
if one looks closely, one will not find a case of the FOMC slashing the target interest rate by 50 basis points when the economy “is in great shape.” On the contrary, a 50 bps (or larger) cut to the target rate tends to come just a few months before recession and a rising unemployment rate. If one looks only at the unemployment rate in these cases, one could see how the economy might look decent even when the Fed starts a rate-cutting cycle. Over the last thirty years, 50-basis-point panic cuts come when the unemployment rate is barely up from recent lows.
Uncannily, the last time the Fed initiated a series of rate cuts with a 50-basis point reduction was on September 18, 2007.
Like today, as pointed out in a thread on x.com by analyst Sven Henrich, US stock markets raced to their all-time highs while the notion of a soft landing permeated the landscape. (Figure 2, lower tweet)
However, a recession began in December 2007, just three months later.
This recession was not officially recognized until well into 2008, even as the Fed denied it in February of that year.
Figure 3
The S&P 500 $SPX soared by 6% in about a month to reach a new zenith. Yet, one and a half years later, the SPX plummeted by 57%, hitting its trough in March 2009. (Figure 3, upper chart)
As a side note, mirroring trends in the U.S., the Philippine PSEi 30 rocketed by 17% in less than a month to an all-time high of 3,873.5 on October 8, 2007, before crashing by 56% just over a year later.
On the other hand, the Fed has opened the 2024 cycle with a "panic" 50-basis point rate cut even when financial conditions have been the easiest since at least September 2023, according to Goldman Sachs calculations. (Figure 3, lower graph)
This means the Fed has opened the liquidity spigot even while U.S. (and global) stocks are experiencing a record-breaking winning streak accompanied by unprecedented levels of debt!
The transmission mechanism has been expressed in different economic spheres.
Figure 4
As Bank of America’s Savita Subramanian observed, “We believe the key difference between this easing cycle and past cycles is the profits trajectory. Historically, profits have almost always been decelerating as the Fed first cuts rates, but that’s not the case today” (Figure 4, upper chart)
Of course, loose monetary conditions tend to spill over not just into share prices but also through various economic channels, partly via profit expansion (wealth effect).
Furthermore, as Credit Bubble Bulletin’s analyst Doug Noland noted, Unrelenting growth in government debt, intermediated through “repos,” the money market fund complex, the Securities Broker/Dealers, and the Rest of World (ROW). Unprecedented speculative leverage that creates both demand for securities and liquidity for asset inflation and history’s greatest Bubble. A historic Bubble in government debt issuance that has fueled asset Bubbles and resulting massive inflation in perceived household wealth, along with ongoing elevated incomes and spending. (bold mine)
So why would the Fed cut rates when current monetary conditions are easy?
U.S. presidential contender Donald Trump believes that Powell’s rate cut was a "political move."
Last June, Mr. Trump stated that he would not reappoint Jerome Powell.
Putting pressure, days before the interest rate decision, three Democratic leaders urged the Fed to implement a 75-basis point decrease.
By boosting the markets and delaying an economic slowdown, this move could increase the odds of a Democratic victory for President Biden's anointed Kamala Harris.
Has Powell thrown his lot with the Harris-Walz ticket to secure his reappointment?
For a non-partisan observer, will Powell’s panic cut result in a "this time is different" "soft landing?"
Or, is it merely delaying an inevitable economic reckoning?
In the end, the USD price of gold sprinted to an all-time high. (Figure 4, lowest tweet)
Is this milestone driven by a mounting #FOMO among emerging market central banks? Is it a safe-haven response to the escalating Israel-Palestine war, Israel-Hezbollah war, or a broader war theater in the Middle East? Is it also factoring in global central banks trapped in their easy money policies, which have accelerated speculative mania and intensified systemic leverage?
We are living in interesting times.
