Fed Rate Cuts
Could more Fed rate cuts be on the cards this year than anticipated?
In Q1 2025, the consensus was for just one rate cut, likely during the second half.
But March’s sharp stock market correction, amid geopolitical and economic uncertainties, with the S&P sliding into correction territory for the first time since 2023, could be what was needed for more Fed rate cuts this year.
If so, front-end rate strategies are back in vogue, based on the whacky logic where bad news is good news.
Gaming the front-end rate trade was the game on the street during the post-2008 financial crisis, and the same game is likely being repeated.
As I noted in a piece, “Bad Is Good Logic”, posted in June 2019, I recalled the collapse in mortgage-backed securities (debt), which created systemic risk, was the root cause of the 2008 financial crisis.
The Fed responded with Quantitative Easing QE, unprecedented amounts of liquidity and a Near-Zero Rate Interest Rate Policy ZIRP to save (their) system.
Fast forward to 2025, and post-March stock market correction, the usual perma bear crowd are growling about a pending market apocalypse.
They are the same crowd that warned of a financial calamity in the 2008 financial crisis.
If investors took note and stayed out of the markets, or worse, they decided to short-sold the market, they would have lost a fortune.
A policy-driven steep recession could be imminent.
Keynesian contractionary fiscal policy, sexed up as DOGE and Fed tightening, in the form of quantitative tightening, where the Fed reduces the size of its assets on its balance sheet, draining liquidity from the market is a headwind on markets and the economy.
Fed rate cuts and quantitative easing, easy money policies, are all the street cares about
Did the penny drop for you in the 2020 pandemic global lockdowns when the global economy was locked down, and what followed was a stock market bull run?
How could that be?
Here are the mechanics of Bad is Good logic, A (pending financial crisis ), B (central bank intervention) and C (markets will go up)
Now, the rule states A=B and B=C, so A=C.
Clues that more Fed rate cuts are coming.
Perhaps that is why the US Dollar Index (DXY) is falling, as gold makes an all-time high.
USD and gold prices are moving in a direction which indicates more rate cuts are coming this year. Lower interest rates drag the dollar down, and because of the opportunity cost of holding gold, the forgone interest in a deposit account is less, and demand for gold rises, pushing its price higher.
So, insider traders could be configuring their portfolios based on more Fed rate cuts in 2025.
If more Fed rate cuts play out in 2025, then trades front-loading the Fed rate cuts could provide alpha.
In this scenario, NASDAQ, which is more sensitive to changes in interest rates, would outperform.
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