‘The Fed moving 50 basis points was nothing more than an acknowledgement that it had stayed too tight for too long.’
It was a big deal when the U.S. Federal Reserve cut interest rates by half a percentage point on Wednesday. But it’s still too early to tell if the central bank’s move was a hit or a swing and a miss.
Markets around the world were happy with the Fed’s move. David Rosenberg, on the other hand, is not moving yet. Rosenberg is the president of Rosenberg Research in Toronto and used to be the top North American economist at Merrill Lynch. He has been a vocal critic of Fed Chair Jerome Powell and the U.S. central bank. Rosenberg says that the rate cut on Wednesday was the right thing to do, but it was long overdue.
Rosenberg said, “The Fed moving 50 basis points was just a call out that it had been too tight for too long.”
It was after the Fed’s decision on Wednesday that Rosenberg talked to MarketWatch. The experienced market strategist talked about what he thinks the Fed’s decision means for the U.S. economy and stock markets in the following interview, which has been cut down for length and clarity.
He says he doesn’t think the Federal Reserve will act quickly or firmly enough to keep the U.S. economy from going into a recession. He thinks that the Fed will be slow to fight an economic slowdown because it was slow to fight inflation. That’s why Rosenberg is telling investors to put their money into rate-sensitive assets. These assets might not be immune to recession, but they are more likely to do well during a Fed monetary easing cycle that he thinks will bring the federal funds rate down to where it was before COVID, which was 1.75%.
Rosenberg said, “The recession has been put off, but it has not been stopped.”
Hirschberg: There are two things to think about. At the last Fed meeting in late July, this rate cut was already being talked about. They were going to shoot, but they chose not to. That is, they should have cut by 25 basis points back then and by 25 basis points now. The 50 basis-point cut is basically an admission that they missed the chance to cut rates the first time six weeks ago, so they did it again.
The price of stocks in the U.S. market was already paid two-thirds of the way for a 50 basis point cut. So they pretty much did what their marketing already said they would do. Based on what they thought at the time and how the data has changed since then, it was probably the right thing to do. I understood why the 50 basis point cut was made.
Rosenberg: The most likely thing that will happen is that we are in a soft landing right now. If you listen to Fed Chair Jerome Powell’s tone-filled press conference after the meeting, the move was really just a down payment to protect the “goldilocks economy” or “soft landing.”
Rosenberg: No, no. I don’t believe in fairy stories.
There is a standard case of cognitive dissonance going on in the FOMC. The monetary policy is still way too tight. The Federal Reserve’s decision to raise rates by 50 basis points was just a sign that it had been too tight for too long. Powell did nothing but try to make things sound better. He said that the U.S. economy is strong, but he also said that the risk of the job market going down is greater than the risk of inflation going up.
‘Even as the Fed eases, the impact of what it has done in 2022 and 2023 is still staring us in the face.’
Rosenberg: The Fed’s move doesn’t make me feel any better at all. They fell a little further behind the economic curve, but they are still a long way behind. The federal funds rate has gone up by more than 500 basis points since the lows, so this move, even though it was big, was only a dent. What the Fed did in 2022 and 2023 is still having an effect, even though it is easing up. The economy has been through the harshest round of tightening since the Paul Volcker years in the 1980s. There is no “get out of jail free” card for it now. The decline has been put off, but it has not been stopped.
Take a look at the long list of strange things Powell said. Even though he says the job market is strong, he talks about how the employment numbers have been artificially inflated in his opening comments. It’s silly to talk about how strong the job market is while also saying that the numbers is too high. Powell had two different points of view.
What else did Powell do? He talked about the Fed Beige Book at his press session. No one asked him. He was the only one who brought up the Beige Book. There are no plans to change the Beige Book. It gives a lot of detail about what’s going on in the country. It was just recently found that half of the country is in a slump. It’s the same recessionary thumbprint we saw in July 1990, March 2001, and December 2007. We used data science to look at the latest Beige Book. In other words, they are very far behind.
‘Treasury bond investors can look forward to equity market-like returns.’
Hirschberg: It means that the 10-year U.S. Treasury note TMUBMUSD10Y 3.738% goes to 2.5% or less, and investors in Treasury bonds can expect returns similar to those on the stock market. If my prediction comes true, long-dated zero coupon bonds will give you crazy high gains over the next year, so I’m telling my clients to buy a lot of them.
When the economy slows down, prices go down, and interest rates go down, you want to be in stock market areas that do well. This would include stocks in telecoms, real estate, finances, utilities, and growth stocks that pay dividends and have high payout rates. In general, a lower discount rate would be good for tech stocks and other stocks that investors like. However, multiples are still way too high for me to suggest them.
And gold? The bond-bullion barbell is the most important part of my current portfolio plan. Rates are going down. The value of the U.S. dollar is going down by 0.31%, and the value of gold is going up by 0.33%.
Hirschberg: There is already a price bubble in the stock market. Costs are taking into account a lot of hope about what earnings will bring in over the next two years. It’s possible that the stock market is in a bigger bubble.
However, the stock market is not part of the Fed’s job. The job market is. People who own stocks should be worried about a slowdown and less money coming in. That’s where the stock market will have trouble. The S&P 500 SPX 1.72% will go up if the Fed cuts rates and there isn’t a recession. After rate cuts, the stock market will still be down if there is a slump.
‘I wouldn’t be surprised to see two more 50 basis point cuts.’
Hirschberg: There are still two Fed meetings to go, and I don’t think we’ll see any more 50 basis point cuts. But the question is: where do you want to go? Look at what Powell said in August at Jackson Hole: In early 2020, the job market and inflation rates are back to where they were before COVID. Where did the fed funds rate go before Covid? At 1.75 percent. That’s why we’re going back to 1.75. I don’t know if it’s 2025 or 2026; I only know where things are going. The funds rate was 1.75% before Covid, and now we’re going back to that level. There will be a steady stream of rate cuts until the end of the year, when the rate will reach 1.75.
Rosenberg: In the past, the Fed has moved slowly. The machine moves slowly. It sees something that most of us don’t when it moves 50 basis points. Rates should not have been cut by 50 basis points. People should ask why. The Fed has changed its mind since 2021, when it fell far behind the inflation curve. Now it is moving ahead of it.
The Federal Reserve fell behind the curve of inflation, and now they’ve changed the growth curve in the same direction but the opposite way. “Do not fret about inflation,” they told me. Oh no! “Don’t worry about the economy” is what they say now. Once more, they’ll say “oops” next year. Since it was founded more than one hundred years ago, the Fed has made mistakes going both ways. When the Fed does its job right, there are no recessions.
The only thing Powell was right about was that monetary policy will be set by the facts and how the economy changes over time. The fed funds rate will be 1.75% by this time next year, based on the same facts and changes that led to this 50-basis-point cut.
