Street Analysis

It is widely expected that the Federal Reserve, commonly referred as Fed, shall lower the interest rates by 25 basis points, i.e. a quarter percentage point after the end of a meeting today. Fed has been under the tremendous pressure or even an outright assault from the current presidential administration for lowering the rates significantly such as 175 basis points meaning bringing a 10-year treasury rate to closer to 2% than 4% currently.

Federal Reserve independence is under a grave danger and the Fed is likely to cave into some pressure from the administration and appease the White House by lowering at least 25 basis points if not 50 basis points, relatively small likelihood. If the Fed does indeed lower the rates by 50 basis points, it will even open up the flood gates for the “Risk On” strategy and give a huge boost to the stock market, already on steroid.

Frankly, the Fed has been put in the box now, mostly of its own making over the course of last few decades being an enabler and provider of both types of stimuli – fiscal as well as monetary policy. All the excesses of the past are gradually coming home to roost for the denizens of this once-great country called United States of America, hence, the inexcusable rise in the stability from political to economical perspective.

What ensues next is that the ‘stagflation’ is well in the making. First off, Fed was too late to start raising the interest rates post COVID stimulus when the interest rates were brought close to zero. That unleashed the unbearable amount of inflation during 2021 and 2022, which started coming down after Fed aggressively started raising rates in March of 2022 through July of 2023.

Hence, the stock market retracted significantly, close to 20% only to start rising again in 2023 as the Fed did not go far enough to raise rates as much as it should have gone and more importantly, AI boom came into the being as covered in an earlier post.

To top it off, the Fed started lowering rates again in September 2024, barely a little over a year post all increases as the U.S. is so much addicted to lower interest rates. See the most recent interest rate change history here. Altogether, the Fed raised the interest rates by cumulative 5.25% only to lower by a percentage point in 2024.

The drumbeat from the Wall Street to lower rates was so strong and frequent yet it did not materialize early enough and big enough. Why? Since, we were not out of the woods yet from inflation. Jamie Dimon was one of the first ones to sound an alarm on start raising the rates and ditto for maintaining high enough rates to combat the inflation beast. However, for the Street and Fed as usual, when addicted to cocaine so badly, it is hard to give up.

The same drumbeat to keep lowering the rates continued all along after the Fed stopped lowering after December 2024 only to get amply magnified by the current presidential administration, especially POTUS frequently insulting the Fed chairman Jerome Powell by calling him “Too Late Powell” and “demanding” to lower the rates significantly. Finally, the first rate cut of 2025 is right around the corner with this September meeting. It is also further expected that the Fed will lower the rates 2 more times with the remaining meetings in 2025, hence totaling the rate cut close to a full percentage point.

Is it warranted? Absolutely, yes, if we look at from the sheer labor data and economic weakening perspective. The U.S. economy does deserve the lower rates. However, if we look at it from the inflation lens then the answer is absolutely, no. Actually, the interest rates ought to be higher, much higher and need to be increased rather than decreased.

Long stated and pursued goal of 2% inflation with the “goldilocks” economy or rather a unique gift that was accorded to the US had been exhausted out already. In fact, we have already killed the “golden goose” that brought a lot of prosperity to many though also created extreme inequalities in the society, hence, the introduction of major culture wars aside from political and economic ones in U.S.

Even though, the inflation has been brought under control after rampant rise during COVID, it is no where near 2% that we were accustomed to in recent decades, instead it hovers around 3% to 4% with gradually creeping up owing to the major tariff effects. To soften the blow, unfortunately, the media often emphasizes the “core” inflation – without food and energy as if we can leave without them both and even “super core” inflation that excludes shelter, which we can certainly leave without, right? ☹

No doubt, it helps to look at those “stripped off” versions of inflation, yet what matters at the end of the day is “total” and “real” inflation not the stripped-out versions like core or super core. Hence, the average Joe is suffering big time. The real wages are not keeping up, hence, we have become the society of “haves” and “have-nots”, prime result of all of the inequalities that we were wildly successful in building over the course of last 4 decades in our once-great-nation. No wonder certain elements of the society have resorted to assassinations to justify their causes.

What follows next is precisely what Ray Dalio, founder of Bridgewater Associates, a major hedge fund, has been warning about for a long time and most recently chronicled here via his LinkedIn post. According to him and his historical studies, we are in the “Big Cycle” and unfortunately, it all is downhill from here… until it turns around. We in fact see no light at the end of the tunnel as no positive catalysts have emerged yet and the situation is only being compounded with more and more negative catalysts.

Economic growth is stagnant owing to suicidal strategy of tariffs and self-inflicted wounds on many other fronts. On the other hand, the employment picture is already getting more and more bleaker. Hence, the ‘misery index’, which is a summation of the unemployment rate and inflation rate is only going to get worse. There is no end-in-sight to the misery from all angles. See the raw data of misery index over last 75 years here.

Misery index in 1970s and early 80s was pretty high and made lives really miserable for a lot of people. I am afraid that we have to brace for the same for many folks in our country owing to our stupid policies at minimum from last 40 years and now an unprecedented power grab by the evil forces of current administration to enrich itself and its cronies, not an average American.

The bottom line is that what Fed would do will be drastically different than what Fed should do, especially now that we have to service a huge debt of $37 trillion where the debt service alone is crowing out many other things in U.S. fiscal budget, even the defense expenditure.

Unfortunately, the Big Cycle continues until we break out of a cycle once again like many great countries or civilizations have done in the past including the United States of America…