Monetary Loosening Cycle
The Fed’s monetary loosening cycle started with a 50 basis points September rate cut, as I forecast.
So the “expert” consensus got it wrong again.
“100% of leading US economists expect Fed rate cut this week; Vast majority predicting 25bps reduction; 17% forecasting cut of 50bps,” Yahoo Finance, dated September 17.
Could this be the negative phenomenon of group think, leading to faulty or uninformed thinking?
The takeaway from the Fed’s monetary loosening cycle
Betting against the consensus of just 50 basis points cuts for Q2 2024 could be a good play.
Exhibit one illustrates that approximately 86% of major financial institutions believe the Fed will make 50 basis points, cuts or less in their Q2 rate cut forecasts for 2024.
“More rate cuts to come following the September rate cut,” I commented in a piece entitled, September Rate Cuts.
“I would not be surprised if the Fed cuts more aggressively than the market consensus,” I added.
“The committee has gained greater confidence that inflation is moving sustainably toward 2 per cent and judges that the risks to achieving its employment and inflation goals are roughly in balance,” policymakers on the US Central Bank’s rate-setting committee said in their latest statement on Wednesday.
Policymakers now envisage the Fed’s benchmark rate falling by another 50 basis points by the end of this year, another 100 basis points in 2025 and a final 50 basis points in 2026.
So, the over-hawkish view of the rate trajectory for the rest of 2024 could also be wrong.
If the Fed fund rates drop from 2.75 per cent to 3 per cent, in 2026, is considered a neutral monetary policy stance, which neither encourages or discourages economic activity.
The Fed’s monetary loosening cycle with its recent 50 basis points cut, taking the Fed fund rates to 4.75% to 5.00% range, is still in restrictive territory
Despite the recent 50 basis point cut, the current Fed fund rates remain a headwind on the US economy.
Moreover, Monetary policy time lag varies from six to twelve months, the implications being that the economic data could continue to flag recessionary signs despite the Fed implementing a 50 basis points cut in September.
Inflation woes are in the Fed’s rear mirror, with recessionary signs ahead and rising job losses, the Fed’s monetary loosening cycle dot plot could be steeper than the market consensus.
There tends to be a post-US presidential election boom, and given the polarizing state of US politics, that would be most favourable.
It’s better to have a productive populace than one fighting in the streets.
My fifty cents on the Fed’s monetary loosening cycle could be more dovish than anticipated.
Risk on assets, The Nasdaq, small caps, real estate and other leveraged assets do well in a monetary loosening cycle.
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