Is the Fed spending too long in the shower?
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Why are markets pricing in a 50‑basis‑point Fed cut this week?
With markets moving towards an expected 50 basis point cut from the Fed, does that mean the Fed will just follow the market? And is the Fed being too data dependent? Paul Krugman has been a bit prolific on Twitter in the last 24 hours, saying that if you stay in the shower too long waiting for the data, you're gonna either freeze to death or scold yourself something rotten. Is he right on that? He certainly thinks the Fed should need to move quicker than they are, so we'll look at that today. And Canadian CPI as well. Well today, what does that mean for the Bank of Canada? They are very close to their target array now, so do they stop where they are or do they stay in the shower a bit longer, getting it back to room temperature?
It's enough of that analogy now. I think it's Tuesday, it's the seventeenth of September 2024. It's the morning call from NAP. Well, the US dollar is down again this morning. It's down naught point four percent. It wasn't far off, it's one year low today, in fact. But the Aussie dollar up naught point six percent to sixty seven point four US cents. The pound also up naught point six percent, and naught point four percent for the euro and for the Swiss franc. Not much going on with the yen today, and not a great day for US equities. The Dow is doing okay, that's up naught point six percent, but the S P is up only naught point one percent. The Nasdaq is down naught point. six percent, but the Russell two thousand up naught point three percent.
So a bit of broadening happening, but some downward moves in big tech, Nvidia shares down two percent today, Apple down two point eight percent. People really don't like that new phone. Uh it's not so good for Europe either, with the DAX closing down a third of one percent. Same for the Eurostocks fifty, the FTSE one hundred managing to get just into the green. And bond yields are lower. Ten year treasury is down another Two basis points down to three point six three percent. German Bundes also down three basis points for ten year yields. Aussie ten year yields were flat yesterday at three point eight one percent, pretty much where they stayed overnight on futures, and oil is higher, big moves up in fact.
WTI is up two point seven percent, Brent two percent higher, and spot gold, well it's just up a little bit, but enough to reach another record high.
Is the Fed becoming too data‑dependent, like Milton Friedman’s “fool in the shower”?
So here's JB Weir's Sally. all this morning. So markets are pricing more towards that fifty basis point cut now from the Fed this week. And I guess if the markets are pricing in more for that larger cut, does that mean the Fed then becomes more likely to just say, well look, you know, let's just follow the market. You're telling us this is what you're expecting. We're gonna do it at some point. Let's just do it now.
Yeah, certainly I guess the the the argument that if the door's open you may as well just walk through it. Um I I guess, you know, going into this week's FOMC meeting, um, you know, it was clear that the decision hadn't really been made. Um there were, you know, a number of Fed officials who were saying it makes sense just to be sort of cautious and measured and do twenty fives and take it one step at a time. Um others sort of past and present from from the Fed saying, you know, the case is really clear for a fifty. Um and obviously then we had the articles over the weekend, um, in various publications, you know, suggesting that the market was perhaps underpricing the chance of the fifty basis point cut from the Fed.
Um and I guess it all really dis comes down to I mean the argument behind cutting fifty is really this notion that, um, you know The funds rate is somewhere between five and a quarter, five and a half. Um that's a a very restrictive setting of monetary policy. Real rates in the front end of the curve are extremely elevated in the US. Um and you're now dealing with the macro situation where you're far more comfortable about the inflation outlook and increasingly worried about the labour market outlook. And so their models would be telling them, you know, we don't need a funds rate with a five in front of it, we probably need a funds rate
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Chapters
7 chapters
1
Why are markets pricing in a 50‑basis‑point Fed cut this week?
0:01–1:58
2
Is the Fed becoming too data‑dependent, like Milton Friedman’s “fool in the shower”?
1:58–4:20
3
What does the latest Canadian CPI tell us about the Bank of Canada’s next move?
4:20–6:43
4
How are global equity and currency markets reacting to the Fed‑cut expectations?
6:43–9:03
5
What are the arguments for a 50‑basis‑point cut versus a more gradual approach?
9:03–11:34
6
How do mixed US economic signals (manufacturing, labor, inflation) affect policy choices?
11:34–13:59
7
Which central banks (Fed, BoC, ECB, others) are likely to lead the next rate‑cut cycle?
13:59–15:24