I woke up this morning in a pretty good mood until I looked outside and then checked the news on the computer. The skies were cloudy and it was beginning to rain. An already storm soaked lowcountry of South Carolina was in the way of Hurricane Debby and possibly over a foot of rain. That means flooding. Not good. Insurance premiums have doubled here, like other low-lying areas, for the past several years. No end appears to be in sight.
Then the markets. Dow futures were down some 1,200 points, the 10 year treasury was hitting new recent lows, and Bitcoin had fallen out of bed over 15%. Yikes. What is one to do? Turn on the Olympics and forget about your worries. Maybe, but I’m over the Olympics too. Good luck to America and the athletes, but NBC and Peacock would make you think they were solving the world hunger crisis. Sports after all are but I diversion from the real world itself. But I digress.
We’re on the precipice of potentially historic Fed action in regard to the day’s market turmoil. As we iterated in a recent Investing & Money piece, a Federal Reserve move one way or the other was likely to leave one side of the aisle out in the cold. But the markets are much smarter than the Fed, made up of the collective wisdom of men and women around the country who many of which have been down this road before. Perhaps it was never really an either/or proposition for the Fed, politically speaking.
Overnight events in Asia, particularly Japan, added a spark to the recent lackluster earnings and hyped up AI fire, to which the markets said enough. Down we go. The markets today have brought up the notion that the Fed may take an emergency step to shore up the economy prior to its September meeting. This would ostensibly benefit neither party, as a between Fed meetings interest rate move would surely be seen as apolitical, performing in the gestalt benefiting the whole as opposed to the separate parts.
As mentioned, the selloff in Tokyo got the ball rolling this morning. On the back of a somewhat unexpected rise in the rate of the yen, the popular “carry trade” began to unwind. Investors have been buying riskier assets in the U.S. with lower priced yen for the past number of years. With the rise in the yen and the deleterious U.S. economic data of late, this trade is now under fire and one of the culprits in the falling markets currently.
Technology at home is also behind the move down. Perhaps overzealousness in artificial intelligence has brought the big tech names down. Warren Buffett’s Berkshire Hathaway on Saturday disclosed that it had slashed its position in Apple during the second quarter, selling nearly half of its huge stake in the iPhone maker. Apple is down in trading today some 3%. According to Brian Burrell, portfolio manager at Thornburg Investment Management in Santa Fe, N.M., “It’s something that people pay attention to due to his historic track record of going against the greed-and-fear rotations of the market.”
So why doesn’t the Fed step in to the market and lower rates before its September meeting roughly a month and a half away? It’s possible and has been done before, but not as likely as waiting to do it in September. Has it been done before you ask? Yes, most recently in 2020. On March 3, 2020, the Federal Reserve made an emergency rate cut of 50 basis points in response to the economic impact of the COVID-19 pandemic. This was the first emergency rate cut since the financial crisis in 2008. On the heels of that cut, on March 15, 2020, Just days after the initial emergency cut, the Federal Reserve made another emergency rate cut of 100 basis points, bringing the federal funds rate to near zero. This was done to support the economy as the pandemic continued to spread. That was somewhat unprecedented, with the federal funds rate near zero, the Fed was out of interest rate reduction ammunition.
The wizard of Wharton, Jeremy Siegel, is beating the drum for an emergency rate cut by the Fed, and he makes some interesting points. Some key facts that led him to that decision:
- The fed funds rate right now should be somewhere between 3.5% and 4%, according to Siegel.
- The Federal Reserve kept interest rates at 5.25% to 5.5% after its meeting last week.
- On Friday, the jobs report showed slower growth than expected and an unemployment rate that moved higher to 4.3%, its highest since October 2021.
Siegel on Monday called on the Federal Reserve to make an emergency 75 basis point cut in the federal funds rate after Friday’s disappointing jobs report. He doesn’t stop there. Siegel goes on to say, “There should be another 75 basis-point cut indicated for next month at the September meeting, and that’s minimum.” Two key points that Siegel mentions. The first is that the unemployment number at 4.3% was higher than the Fed number at 4.2%. Secondly, the fact that the Fed is 90% of the way back to its inflationary rate target of 2%. That’s not too shabby. The cries to cut are out there on the street and apparently the Fed is listening. Chicago Federal Reserve President Austan Goolsbee stated, “If the economy deteriorates, the Fed will “fix it.”
The futures markets would agree. My how a few days changes things. Futures prices now imply the Fed will cut rates to a range of 4% to 4.25% by year end, according to CME Group data. That would require 1.25 percentage points in cuts over its meetings in September, November and December. We’re thinking that an emergency rate cut will happen this week, or probably not at all.
