This is one of easiest stories a commentator can write, especially since a blind drunk caveman could do it.
And yes, yours truly does enjoy his adult cocktails but to say one needs a buzz to write this would be totally incorrect.
These pages cast their bid on Sunday night for a 50 bps cut in the Fed Funds Rate by the FOMC not just because of the weakness in the employment data.
Sir Isaac Newton is Today’s Guest Economist
This great cartoon from the American Physical Society illustrates how economics works, especially when nothing else can explain the actions of objects suddenly moving down regardless of the appearance of activity. Sir Isaac’s famous Law of Gravity basically states:
Newton’s Law of Universal Gravitation states that every particle attracts every other particle in the universe with force directly proportional to the product of the masses and inversely proportional to the square of the distance between them.
What does the ability of an apple to fall from a tree have to do with bond yields, Lisa Cook’s rental properties, Stephen Miran’s ability to do astral projections at the FOMC meeting, and Jay Powell yearning for the day where he could have just been a corporate lawyer?
Everything.
2007 Says Hello Again
Leading up to the Great Financial Crisis (GFC), the Effective Federal Funds Rate (EFFR) remained relatively stable despite some signs of stress beginning in 2006. In fact looking at the US 2 year yield, one did not notice any market warning signs until late in 2007.
The biggest issue was that the yields broke hard after the summer began generating a directionality of a collapse in yields which lasted deep into 2008.
But what did the EFFR do during the same period?
The word “yikes” comes to mind but that does not do this justice. There were numerous signals that there were major economic problems coming starting with the alleged discount window cut backdoor bailout of Goldman Sachs in August of 2007, right up until the Great Recession began in December and the collapse of Bear Stearns in March of 2008.
One thing seemed to stand out, the spreads between the US 2 year Treasury expanded versus the EFFR every time before the Fed acted.
The 2025 Jay Powell Introduction to Gravity
Chairman Powell was put into the position during the most unfortunate of times. A populist President who enjoys blaming everyone else for his mistaken policies in addition to an economy which allowed its national deb to grow exponentially with the assistance of his policies created an embedded inflation rate far north of the so-called Fed’s 2% target rate.
Once again, the US 2 year yield seems to be sending a warning, starting last year:
As these pages have been focused on surviving in this economy and unfortunately not commenting as much as I used to except for snarky pictures and comments on X, I missed the 2 year yield breaking below the September 2024 lows.
Is that fact important like it was in 2007?
Possibly:
Perhaps Mr. Newton was correct that gravity will not allow its laws to be violated as every indication from the US 2 year yield is that a dramatic move lower is possible starting tomorrow with the FOMC meeting, thus the prediction on Sunday night from these pages.
Don’t Worry, No One Be Happy
Thus the ease of writing this article tonight where I predict no one will be happy if the Fed doesn’t cut, cuts only 25 bps, or cuts the full 50 bps as predicted. Let’s address each scenario briefly:
1. The logical move would be a dovish no cut scenario. It would check the inflationistas like myself who believe that we are about to experience a brief but sharp increase in domestic consumer inflation not due to shelter prices but the persistent increase in commodity prices and services killing the American consumer and increasing the odds of drastic administration actions leading to a period of cyclical stagflation.
2. The 25 bps move. This is considered by Wall Street as the most likely scenario which would indicate a timid FOMC unwilling to look ahead to the slowing economy and lead to massive attacks not just from the administration, but perhaps the bond market deciding to send a warning shot with equities across the bow of the administration and the Fed that more needed to be done. If anything, this would be seen as an indication that more instability is ahead and that the FOMC is maintaining its historic path of being behind the curve. Just like 2007.
3. The 50 bps cut. This is the outlier but is it? Last September there was no economic reason to cut interest rates by 50 bps except if one looks at the chart in the previous section, gravity was taking over and pulling, almost demanding a major cut to narrow the spread. Here we are again with the 2 year some 83 bps below the EFFR and worse, a slowing economy with major economic problems hitting the lowest 50% of American consumers. The bond market might even get angry with a major cut like this and sell off to “punish” this rash action. In fact, after the cut, the much heralded but false flag that the “bong vigilantes” have returned as rates rose into year gave hope that the smart money was ready to take over.
Just like 2007, and look how that faded then and thus far now.
In the end, Jay Powell will have to deal with an angry President in the United Kingdom wishing to become royalty like King Charles where he could order the guillotine for his opposition. The markets will like some of the decisions above for various reasons, but the GOMA decision lead by Powell (“Get Off My Ass” Trump) 50 bps cut could propel markets to new highs until they start to ask questions about the condition of the underlying economy finally.
Regardless, there is no reason to celebrate tomorrow’s decision no matter what it is.
If we didn’t have a Federal Reserve and allowed the “grown-ups” to decide market interest rates, the US 2 year would have sufficed to achieve the same goals over 20 years ago.