Two weeks ago, in the immediate aftermath of the Nov 14 Fed dovish decision to keep rates on hold which even Powell’s own WSJ mouthpiece Nikileaks, aka Nick Timiraos, admitted killed any chance for more rate hikes, we said that with July now the Fed’s last rate hike, “it takes 8 months on average from the last rate hike to the first rate cut. So March“
It takes 8 months on average from the last rate hike to the first rate cut. So March https://t.co/J9IULydqcA pic.twitter.com/SXFwn95DEA
— zerohedge (@zerohedge) November 14, 2023
Fast forward to Tuesday when none other than the Fed’s (formerly?) uber-hawkish governor Chris Waller, yanked the carpet from under the herd of “higher for longer” sheep, when he pivoted the Fed’s messaging on its latest dovish trajectory, saying that he is “increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%. I’m encouraged by what we’ve learned in the past few weeks – something appears to be giving, and it’s the pace of the economy.”
And then there was this “If you see this [lower] inflation continuing for several more months, I don’t know how long that might be –3 months? 4 months? 5 months?–you could then start lowering the policy rate because inflation’s lower.“
Addressing this shocker, Nomura’s Charlie McElligott wrote that Waller “lent the most credible voice to the scenario… that with the current pace of the disinflationary trajectory being way ahead of schedule, that the Fed will likely need to CUT RATES as the next move, simply in order to prevent policy from being either overly restrictive, or even worse, “tightening” further via “real rates” as inflation craters…and critically now, legitimizing the Fed “cutting” rates even WITHOUT a Recession being required, which I’d posit is a scenario that most outside of the Macro Rates space didn’t really know had any Delta.”
In-doing so, Waller also put a time horizon on this sea-change (potentially requiring “just” three to five more months of current disinflation trend to confirm), which to McElligott means that “we could hypothetically get said “soft landing cuts” as soon as March / May 2024—which then ushered in a whole new distribution of implied Fed policy rate projections” as we saw 115-120bps of cuts now priced-in, and pulling-forward the first full cut into May from June.
So, yeah, suddenly March emerges as an all too likely first rate cut day… just as we first said two weeks ago.
But it wasn’t only a Fed governor agreeing with us: none other than billionaire Bill Ackman, best known for his staunchly bearish Treasury position (borne by his conviction that inflation and rates are going higher) which he only covered just a few weeks ago, flip-flopped overnight, when speaking to David Rubenstein, he said that “I think they’re going to cut rates sooner than people expect.” Ackman then clarified that such a move could happen as soon as the first quarter… i.e, March.
“We’re betting that the Federal Reserve is going to have to cut rates more quickly than people expect,” Ackman said in an upcoming episode of The David Rubenstein Show: Peer-to-Peer Conversations. “That’s the current macro bet that we have on.”
Ackman then paraphrased Waller saying that “what’s happening is the real rate of interest, which is what impacts the economy, keeps increasing as inflation declines.” The Pershing Square boss, who has a penchant to appear in tears on CNBC any time a trade doesn’t quite go his way, said that if the Fed keeps rates in the roughly 5.5% range when inflation trends below 3%, “that’s a very high real rate of interest.”
Ackman also told Rubenstein he’s not convinced the US economy is headed for a so-called soft landing, a scenario where the Fed raises interest rates without triggering a recession. “I think there’s a real risk of a hard landing if the Fed doesn’t start cutting rates pretty soon,” said Ackman, noting that he’s seen evidence of a weakening economy.
Of course, not everyone agrees that a rate cut is coming and this morning, the OECD warned that inflation could force central banks in western Europe to keep interest rates higher next year than financial markets expect, despite some of the weakest global growth rates since the financial crisis.
In its latest economic outlook, the Paris-based organisation said it expected the European Central Bank and the Bank of England to hold benchmark rates at their current peaks until 2025 — much longer than the markets are expecting — because of persistent inflationary pressures.
Clare Lombardelli, OECD chief economist, said that, while the organisation expected a “soft landing”, it was too soon to cut borrowing costs.
“Monetary policy is going to have to remain restrictive for a period of time — we are still worried about inflation persistence,” she told the Financial Times. “You are going to need real rates to be high.”
Ironically, the OECD also made the dovish case, when it forecast that growth in the world economy would weaken to 2.7% next year, the most sluggish rate since the financial crisis except for the first year of the pandemic, and in danger of sliding into recession absent more rate cuts.
And while the Fed cutting rates is a certainty, and a matter of when not if, the real question is what crisis will the central bank throw into the mix to also greenlight what the catastrophic US fiscal situation truly needs: not rate cuts (which will lower rates on Treasuries and thus trim demand for them further) but QE, because in a country where the debt rises by $1 trillion every 3 months and where taxpayers are increasingly unwilling to hand over their money to either Zelenskyy or Netanyahu via the Biden administration’s spending like a drunken sailor, only the Fed’s unlimited monetization of record US deficits will keep this particular circus going.
Remember: cutting rates without restarting QE won’t help the fiscal picture where the US now adds $1 trillion in debt every 3 months. Someone has to buy it (especially if rates drop). So the Fed will need a crisis.
— zerohedge (@zerohedge) November 29, 2023
Tyler Durden
Wed, 11/29/2023 – 10:45
