Do you think the market has backed off the possibility of a Fed rate cut?
Ajay Bagga: The question is when have we moved on and how much? So, the September rate cut is very good. First, there is the relief, because 2022 was a bitter lesson when Jerome Powell talked a lot about the economic pain to come because of inflation and it tanked the markets. In 2023, the lesson was well learned and today it was expected. The only problem is that when the data is ambiguous and you continue to rely on the data, the models do not work in terms of prediction. It grasps the market at straws.
And then what happens? Every data point sees a very volatile reaction, which we’re seeing and today markets are up in anticipation of a rate cut. However, it remains data driven and event driven. So, overall, September is baked. He has said that we know the direction.
Third, he also chose to reassure the market and said that we have a lot of ammunition because we are sitting at 5.25% to cut rates quickly if there are problems with the labor market. So, there is some degree of certainty as well. Markets reacted positively. Bond yields fell. The stock market soared. The dollar weakened. Gold rose. All on the expected lines.
Where does the truth lie in terms of the American economy, depending on how it will do in the future you’ll be left scratching your head and wondering?
Ajay Bagga: Why I call the data ambiguous is because 800,000 jobs have been cut from the last year’s data and they are making decisions based on that data. So, the data is wrong and you say I am data driven. Your forecasting models don’t work in a digitized economy. Despite all these flaws, the E&O line in the Fed’s decision-making process that is saving them is the trillion-dollar fiscal deficit. So, when you have 4-4.5% year-on-year stimulus on an economy the size of the US, it washes away all sins.
Wall Street is sharply higher on hopes of a Powell Cement September rate cut
So, that stimulus is temporarily washing away all the mistakes of omission and commission by central banks. But going forward, the cost of debt will be higher.
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