We’ve got a 94.7% chance of a 1/4% rate cut by the Fed next week. It’s not 100% because there’s a 5.3% chance that the fed will cut 1/2%. This rate cut became a certainty a few weeks ago on August 22nd. Since then, mortgage rates and the 10 year treasury bond (both considered “long-term” interest rates) have both declined by exactly 1/4%. It’s been awesome to be able to offer everybody lower interest rates these last few weeks! Interestingly, we saw the exact same action in the markets a year ago leading up to the September Fed meeting where they lowered their interest rate 1/2%. Then, given the cautious rhetoric in the Fed’s prepared statement after the announced rate cut, long term interest rates went right back up 1/2% over the next week.
That move by the Fed a year ago disinverted the 10/2 yield spread curve and normalized the risk/reward associated with lending money to the government (or anybody else) for the short and long-term, thereby ushering a “normal” economy. But historically that won’t come without first experiencing some recessionary concerns–if not the real thing–for a period of time.
While I am a touch concerned that we will see a repeat of that pattern next week and long-term interest rates will float back upward, there are now many data points that indicate the labor market (IE: Jobs) is tightening up, the velocity of money is slowing down, and the cost of goods and services is declining. This combination of factors puts us in a period of disinflation, drawing us ever closer to the Fed’s 2% YOY target range, and perhaps in danger of blowing right past it and into a real live recession. Probably not Grapes of Wrath level of hardship, but maybe “Married…With Children” for much of America. Or hopefully, our appointed ministers of finance that know a lot more about the economy than I do have orchestrated beautifully this “soft landing” that has been being engineered for the last three years. We’ll find out soon enough.
