Something very odd happened in July of 2008 – only a few months before the biggest financial meltdown since 1929.
Inflation was over 5% (double today’s levels), the Fed was panicking, and the markets were predicting a Fed rate increase in August of 2008.
What makes that so comical is that only a few months later in October of 2008, the Fed did an emergency rate cut of 50 bps, shortly after the Lehman collapse (and we saw “DEFLATION” set in).
That is hardly an isolated incident though, as there are many examples of the Fed cutting rates unexpectedly, including:
- January 3, 2001 – 50 bps, in response to the dotcom crash.
- January 22, 2008 – 75 bps, in response to global stock markets crashing.
- July 31, 2019 – 25 bps, out of the blue. Powell blamed a trade war, but it was just a soft economy in general.
- March 15, 2020 – 100 bps, in response to Corona Beer losing $2 billion in market cap because people associated them with a virus (there was also that COVID thing).
But this is what is really interesting: the bond market hardly budged in response to all of those big cuts (10-year yields fell 10 to 15 bps at most) because bond investors had already responded to the same conditions the Fed was responding to. In addition, rates may have fallen because of market conditions on those days and not because of the Fed’s actions.
And this is the other takeaway: market conditions forced the Fed to make cuts in direct contradiction to its previous comments.
The Fed is always responding to market conditions, as opposed to following a prescription – so its policies can turn on a dime.
Unusual: The Fed Cut Rates Yesterday & Rates Fell!
Every time the Fed is about to cut rates, we warn our borrowers that mortgage rates rarely fall in response to the cuts. This is because the market has usually accounted for the cuts prior to the announcement and because the Fed does not control long-term (mortgage) rates.
Yesterday, however, mortgage rates actually fell after the Fed announced its rate cut. Rates, however, did not fall because the Fed cut the Fed Funds Rate; rates fell because of Fed Chair Powell’s comments.
Among other things, he acknowledged how soft the job market is and how much inflation is cooling off. He also announced that the Fed would soon begin buying $40 billion in short-term T-bills every month (yes, Quantitative Easing is back).
Every Time Rates Move in Response to the Fed’s Comments, I Say the Same Thing…
Don’t worry, the effect won’t last, as the bond market’s gonna do what the bond market’s gonna do, irrespective of the Fed comments. And today is no different.
Mr. Powell Also Signaled “Restraint” When It Comes to Future Rate Cuts
This worried many people in the mortgage and real estate industry who very much want to see more rate cuts by the Fed.
But my point is once again – the Fed’s “signals” and comments don’t make much difference … because the bond markets gonna do what the bond markets gonna do no matter what.
And what the bond market does is respond to growth and inflation expectations, no matter what.
In addition, the Fed’s going to respond to market conditions in the future no matter what Mr. Powell says it’s going to do today.
