The shit has finally hit the fan

Dear Reader,

Yesterday the shit has finally hit the fan, the FED cuts rates with 50bps to 4.75-5.00%. For those who wonder why there are two numbers here, it means simply that overnight lending among U.S. banks is set?as a range between an upper and lower limit.

There are 12 voters in the Federal Open Market Committee ("FOMC") to decide and 11 of them voted for a 50bps cut while only one voted for a 25bps rate cut.

Federal Reserve Governor Michelle Bowman on Wednesday became the first Fed governor to vote against an interest-rate decision by the U.S. central bank since 2005, denying Fed Chair Jerome Powell a clear consensus at a pivotal moment.

Here she is:

The rate cut is also falling together with the "un-inversion" of the yield curve earlier on the week. An inverted yield curve occurs when long-term yield rates are lower than short-term rates and is often a precursor to a recession, having preceded nearly all recessions since 1960 by about a year. A normal yield curve shows higher rates for long-term bonds, which generally indicates confidence in the economy. The inversed (or not) character of the yield curve is often measured by the spread between 10yr and 2Yr rates.

Here is a snapshot of this since 1990:

The 50bps rate cut is a significant cut and has troubled the markets a bit why it is "so high" in the first cut. Some suspicious voices point to the upcoming elections, which is not such a bad thought. In the monetary policy statement, the Fed said that the economy continued to expand at a "solid pace," while reaffirming that the job gains have slowed down and the unemployment rate has remained low. Additionally, the central bank noted that inflation is gradually moving toward the 2% target level, but it is still "somewhat elevated."

However... both 50bps rate cuts in the past 25 years had the following effect:

We'll see what it gives in the next couple of months.

Cheers as always,

Luc