Michael Lewitt on this week's expected Fed rate cut

The Fed is almost certain to commit another policy error this week by cutting interest rates by another 25 basis points with stock, housing & other financial asset prices at or near all-time highs.  Financial conditions are already loose so lowering rates will only further loosen them & feed the speculation pushing stock & other financial asset prices beyond reasonable valuations.  Gold & Bitcoin are also flashing warning signs that inflation is not contained (confirmed by recent data).  Nonetheless the Fed seems hellbent on its current easing path. 

As I’ve written all year, there is one compelling reason to cut rates - the cost of servicing the rising federal deficit.  If that is the reason the Fed is cutting, however, the plan is backfiring. Treasury yields have risen by roughly the same amount that the Fed has cut the Federal Funds rate since cutting began a few months ago.  As such, the market is telling the Fed it will demand higher compensation to fund the government under a lower rate regime.  This is entirely logical because lower rates enable higher spending & higher, not lower, deficits (as well as unproductive government spending & speculative private sector activity).  In short, the market thinks interest rate cuts are unnecessary.  The only market players seeking lower rates are private equity & private credit players who have little interest in what’s best for the economy.

~ Michael Lewitt, The Credit Strategist, December 16, 2024