A token 25bps to celebrate 'Mission Accomplished' but 'NOT Completed'.

After a hotter than expected core CPI in August, the Federal Reserve will most likely lower interest rates on September 18th, primarily as a face-saving move for the FED Chairman, who has become impotent at managing the US economy as he decided to declare ‘mission accomplished’ but unlikely ‘completed’.

While Jerome Powell made it crystal clear in the mountains of Wyoming that ‘The time has come’ for a shift in US monetary policy, with rising hourly earnings, even amid a lower August Non-Farm Payroll, and core CPI still well above 3.0% YoY and rising again, market expectations that the FED will cut its federal funds target range by a full percentage point or more by year-end are completely phantasmagorical.

By making a symbolic and politically partisan driven 25-basis-point cut to the FED funds rate, Jerome Powell could save face, support the current administration, and avoid alienating the opposition, which has vowed to reform the FED if elected. Investors should understand that this small cut won’t alter the broader economic outlook. With growing fears of war and civil unrests and a highly contentious election ahead, uncertainty will rise, leading to a decline in consumer spending whoever is declared winner of the political circus around the White House.

FED Fund Rate (blue line); US Personal Consumption Expenditures Nominal Dollars MoM SA (red line) & US Recessions.

Ultimately, what’s reflected in the 10-year long-term rates is clearly the winds of war. From 1981 until 2020, the US government benefited from a 39-year decline in the 10-year yield. Then came the reckless Keynesian spending and regulations tied to the climate change agenda and diversity and equality initiatives, which mainly served to expand uneconomical bureaucracy and create more obstacles for entrepreneurs. This has already led to shortages and supply-driven inflation which will worsen as more bankers’ wars spread across the world.

The high short-dated yields (i.e. 3-month T-Bill rate) signals the looming threat of war. Looking back at history in a scenario which sounds again familiar, when Hitler invaded Poland, Franklin Delano Roosevelt repeatedly sought to bring the US into World War II, but Congress resisted. FDR took several steps to provoke Japan into attacking Pearl Harbor. Once the attack occurred, US interest rates began to rise as the nation entered the war. The flatline in rates that followed reflected the Federal Reserve's agreement to cap rates during the war.

The yield curve that truly matters is the spread between the 10-year yield and the 3-month rate. With the 3-month rate at 4.75% and the 10-year yield at 3.65%, the curve remains heavily inverted, reflecting the Federal Reserve's ongoing effort to combat inflation, which was triggered by (1) COVID lockdowns and (2) sanctions on Russian energy sales. However, no level of rising interest rates can resolve this type of inflation. The US will likely face a sovereign crisis once it officially enters in conflict with the Global South. Meanwhile, Japan and Europe, particularly France, which is heading for a collapse under the leadership of ‘Petit Roi’ Macron, will face their own sovereign debt crises first, as they are at the epicentre of the forever bankers’ wars driven by Washington's warmongers.

US 10-Year Yield-US 3 Months Yield (Histogram); US GDP Annualized QoQ Growth (blue line) & US Recessions.

Regardless of who occupies the White House next, Powell and his PhD colleagues know that interest rates always rise during war. The misguided Wall Street bankers will once again be wrong in thinking rate cuts will solve problems, which will only worsen under 'Kamunism.', as ‘kleptocrats’ and ‘kakistocrats’ keep ruling the western world.

?Kamunism,' central bank masquerades, and with shelter and core CPI inflecting higher, the disinflationary illusion is now over, and investors should be even more wary of the Ides of September.

https://themacrobutler.substack.com/p/the-disinflationary-illusion-is-over