The 10 Year Treasury Yield fell below 4.0% for the first time since late January.
This is in response to continuing weak economic signals (particularly in the employment realm), moderating inflation signals, and the belief that Fed Chair Powell will cut rates in September.
It was one of those rare days when stocks and bonds both did well, as stock prices rose and interest rates fell at the same time (remember: higher bond prices mean lower yields/rates).
It might not last though, as tomorrow’s BLS jobs report could upend all of the happiness and momentum – which should not be the case, given how inaccurate the BLS reports are (but they still move the market).
Also, remember that rates never move in a straight line – so expect rate jumps in any case, even if the overall trend is downward.
Do Rate Cuts Help the Economy?
More importantly though – should the stock market and everyone else be this happy that the Fed will cut rates?
The mortgage and real estate industries should be doing cartwheels, as we all definitely benefit from lower rates.
Barry Habib explained in his commentary today that even a 3/4% drop in mortgage rates will spawn at least two to four million refis, not to mention the millions of more buyers who will return to the market when rates fall because housing will instantly become more affordable.
What I Do to Stop Recessions
Every time a recession starts, I run around in circles in my living room, patting the top of my head repeatedly until the recession ends. And then I issue press releases taking full credit for stopping the recession because there was a clear correlation between my circle-running and coming out of the recession. It’s very tiring but worth it; I’m saving the economy after all. You can thank me later.
Anyway, that is largely akin to the Fed’s actions, according to Jeff Snider in this video: What Will Happen When the Fed Finally Cuts Rates.
Snider: Rate Cuts Are Pure Superstition
Snider calls the rate cuts pure superstition. The reason is that the Fed is always following the market, and its actions do very little to stop the momentum already in the economy.
“The evidence leaves no room for interpretation; rate cuts don’t work,” per Snider. It is a myth put forth by a Fed that wanted to play hero and convince us that the Wizard of Oz actually has power.
Yes, rate cuts can stimulate borrowing, push up asset prices, and help the mortgage, real estate, and tech (growth stocks) sectors that benefit from low rates and cheap money.
But by the time the Fed cuts, the rest of the economy is already in a tailspin – and the economy’s gonna do what the economy’s gonna do, irrespective of the Fed, per Mr. Snider.
Snider’s examples are 1990, 2001, and 2007 – 2009, when the Fed cut rates and we slid into bad recessions anyway.
The rate cuts might have mitigated the recessions (although Snider is skeptical), but they certainly did not stop them.
The Fed also ends up in panic mode every time and cuts rates an average of 5%.
So yes, I think we can expect rate cuts. Just don’t expect them to fend off a recession, as they haven’t yet.
And that of course, means much deeper cuts than most people are predicting.
In the chart below, you can see how the rate cuts precede every recession (gray bars), and you can also see how QUICKLY and how far the Fed ends up cutting every time.
Happy days will be here again… but mostly just for those of us in mortgages, real estate, and tech.
