Markets are pricing over a 90% probability of a 0.25% cut in the Fed Funds rate tomorrow. There is also widespread agreement that this will be accompanied by forward guidance suggesting fewer cuts in 2025 than previously indicated.
It is also expected that FRB Chair Powell will not close off his options for a January reduction but is expected that the central bank will pause.
What comes after January is subject to debate. Consensus anticipates the “skip” will be followed by a resumption of easing perhaps on a quarterly basis.
Few believe there will be an extended pause and fewer believe that this will be the terminal rate.
The consistency of the last four years—and perhaps the last 14 years—is the unexpected occurring. Two years ago, most including the Federal Reserve, thought the economy would be in a recession.
The economy is consistently exhibiting upside surprises.
Few are rushing to confidently suggest the impact of Trump’s proposals. Many believe what he is attempting to accomplish is all but impossible given the high probability of electoral suicide if such policies are legislated. Many also believe that Trump’s proposals are also inflationary.
A question that should be asked what will be the impact if the Federal Reserve explicitly reaffirms its 2% inflation target. Is this indeed realistic? Will the Fed risk losing credibility if it reiterates this target? Accordingly, will there be an increase in the perceived neutral rate or the rate that will neither encourage or discourage growth?
The country has a massive deficit. Increased taxation is not the answer as data suggests that it may not even put a dent in the amount outstanding, an amount that is projected to increase around $2 trillion for the next several years.
The only conceivable answer is stronger than expected growth and lower government spending.
Bureaucracies measure themselves by their budget and head count. I have never read a story about a bureaucracy bragging that they did not spend their entire budget. Moreover, a cut in spending for bureaucracy is not an outright reduction in spending but rather a decline in rate of the forecasted increase in spending.
For example, in government speak, a cut in spending is increasing spending by 3% not the by the previously projected rate of 5%.
Equity markets were bifurcated as the NASDAQ posted about 1.2% gain while the Dow was down about 0.25%. Treasuries were essentially unchanged.
Last night the foreign markets were down. London was down 0.82%, Paris up 0.13% and Frankfurt down 0.02%. China was down 0.73%, Japan down 0.24% and Hang Seng down 0.48%.
Futures are down about 0.25% on monetary policy nervousness. The 10-year is off 14/32 to yield 4.43%.
