In late 2018 the US stock market tanked, in effect holding a gun to its own head and threatening to pull the trigger unless the Fed stopped raising interest rates. The Fed, painfully aware that an equities bull market is an existential threat in today’s hyper-leveraged world, quickly caved, promising no more rate increases if the market would just put down the gun.
This worked for a little while. Stocks jumped to new record highs and unicorn tech IPOs started pouring out of Silicon Valley. Normal, which is to say booming, markets were back.
But of course it couldn’t last. An overleveraged economy is not just addicted to new credit, but to ever-increasing levels of new credit. So stable interest rates won’t stave off withdrawal. From here on out only steadily (or steeply) falling interest rates will delay the inevitable crisis.
That’s the signal the financial markets are now sending the Fed, as stocks begin to roll back over …
… bond yields tank …
… and demands grow for not just patience but acquiescence. Now the question is not if but when the Fed responds with the required cut.
At the moment – mostly because the stock market hasn’t fallen very far — there’s still some resistance to lower rates:
(CBS News) – According to minutes released Wednesday, Fed officials noted that economic prospects for the U.S. and global economy were improving, while inflation had fallen farther below the Fed’s 2% target.
Some officials “expressed concerns that long-term inflation expectations could be below levels consistent with” the Fed’s target of 2%. However, officials still believed a return of inflation to the Fed’s 2% target was “the most likely outcome,” according to the minutes.
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