Why all the talk of multiple interest rate cuts

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seems in my world inflation is still alive and accelerating

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What world is that? Example

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It seems in my world inflation is still alive and accelerating.

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Why lie?

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Why lie?

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Go to hell

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Is this accepted that there are rough waters ahead and as a move to combat it.. mortgage rates will come down etc?

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Sort of.

There's a growing consensus that rough waters are ahead. There are predictors which have great histories of proving themselves as being precursors to recessions.

Of these is the inverted yield curve, this is (very basically) your 10yr yield vs 2yr. In a normal economic period investors are looking to move money around quickly, this includes locking money into securities. As such, during such times the 2yr has a lower yield than the 10yr because the 2yr is more popular (ie: the 10yr has higher yields to attempt to attract buyers into locking their money away for a longer period). This is considered a normal yield curve.

When the economy starts looking shaky, investors will turn away from shorter-duration securities to look for better long-term security, this means the yield on the 10yr goes down as more investors turn to it. Along with that, the yields on the 2yr go up to attract investors.

That point where the 10yr crosses above the 2yr is considered the inversion point and until they cross back it's considered an inverted yield curve. Within 12 months of the curve moving back to normal behavior, we get into a recession (and this has happened in almost every instance).

We've been in an inversion for just over 2 years now, only this month did it reach 0. Understand though that there is no known correlation between depth nor time length of the inversion and the following recession's depth nor time length.

Another predictor is just history. When the Fed has raised rates abnormally high and/or left them high for an extended period, we see a recession start usually within 12 months after cuts begin. You can think of it like this... the Fed raises and lowers rates to influence inflation. The lower the rates, the cheaper it is for consumers and businesses to borrow money to purchase things, expand, etc. Conversely, they raise rates to slow the economy down to keep inflation in check (around 2%). In other words, the Fed isn't going to lower rates when the economy is good (that risks overheating the economy, increasing inflation). So when rates are lowering after an extended period of higher rates, it means the economy is already slowing. Along with this, while rate cuts in such a scenario usually precede a recession, they are actually lessening the impact (when the recession finally hits). With a lot of this, the Fed is trying to estimate where a target will be in the future (which can be confounded with unexpected excesses in federal and/or consumer debt creation).

ButWaitThere'sMore.gif

As to mortgage rates, they aren't directly controlled by the FedFund rate but if you're needing an extreme short-hand you can assume banks aren't going to loan money for less return than they are borrowing it. It's really deeper than that, but if someone isn't wanting to get into the MBS (Mortgage-Backed Securities) weeds then it's probably the easiest way to view it.

If you're still here... MBS is a collection of mortgages bundled into bonds which are then sold to investors. The Fed impacts this not only by setting the FedFund rate, but (and more importantly) by buying and selling those bonds themselves (which raises/lowers as the Fed buys/sells them, think: basic supply/demand). At least, that's how I understand it (getting into MBS is usually a little deeper into it than I normally go, unless I've slept at a Holiday Inn Express).

True US interest expense (debt service+entitlement pay goes) are 92% of tax receipts YTD but more importantly were 120% for July, i.e., the trend is no friend to govt solvency.

The govt can't afford 5.25%. That is why multiple cuts are coming. Everything else is sideshow.

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What world is that? Example

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The world in which people live exclusively within their own political bubble.

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The govt can't afford 5.25%. That is why multiple cuts are coming. Everything else is sideshow.

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Agreed. We are almost forced to keep rates low. There's more high inflation in our future. It's a house of cards.

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Agreed. We are almost forced to keep rates low. There's more high inflation in our future. It's a house of cards.

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I disagree that we're almost forced to keep rates low. We're there. US debt/gdp was about 30% when Volkler took rates to 2X cpi. And that was with housing properly accounted for in cpi, not this modern "owner's equivalent rent" bs which effectively cuts the headline number in half. We're at 120+% debt/gdp now, double digit rates aren't a mathematical possibility.

Agreed on inflation, it always comes in waves and we've only experienced the first one. Whoever wins this election is going to keep the fiscal taps wide open and that's what is ultimately going to reignite inflation.

I think we might be in a post recession world for a few years. I know that sounds bonkers but hang in there for a second and hear the argument: it’s really simple, the US govt can’t afford a recession. Cap gains are the marginal driver of receipts in a highly financialized economy like ours. If equities and R/E meaningfully correct tax receipts fall precipitously and in a recession transfer payments to individuals spike which blows out an already clownishly extended fiscal deficit.

If the govt can’t afford a recession we won’t have one. At the first sign of recession fiscal and monetary stimulus will be used to further extend and pretend like was done in March of 2020. When faced with insolvency governments always choose inflation.

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the US govt can’t afford a recession.

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If the govt can’t afford a recession we won’t have one. At the first sign of recession fiscal and monetary stimulus will be used to further extend and pretend like was done in March of 2020. When faced with insolvency governments always choose inflation.

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That's the problem though, isn't it? If they push higher spending to fight off a recession then that:

1. Creates higher inflation which...
2. Causes consumers to go even deeper into debt and...
3. Causes the Fed to raise rates again, which...
4. Causes the amount needed for the federal government to just service the debt to increase quickly, which...
5. Puts the Fed in the position of having to create a recession to get inflation under control, which...
6. Causes the federal government to try to spend its way out of it, which...
7. Brings us back to Point 1 and repeat the entire process over again.


I don't think we'll ever see another stimmy package like we did with COVID (at least not trillions of dollars put directly into the hands of consumers), but do agree we will very likely see some level of increase in social program spending as an attempt to counter an upcoming recession.

At this point, we're looking at debt servicing being the largest single cost of the federal government by the end of the decade (maybe sooner). At that point, trying to fight it with the usual tools will only exacerbate problems and rush us into a financial collapse as the currency gets crushed under the weight of its debt.