I woke up this morning in a pretty good mood, until I looked outside and checked the news. The skies were cloudy, rain was starting to fall, and Hurricane Debby was threatening to flood the already saturated lowcountry of South Carolina. Insurance premiums here have doubled over the past few years, with no relief in sight.
Then there were the markets. Dow futures plummeted by 1,200 points, the 10-year treasury hit new lows, and Bitcoin nosedived by over 15%. Yikes. What’s one to do? Turn on the Olympics and forget about it? Maybe, but even the Olympics have lost their luster for me. NBC and Peacock would have you believe they’re solving world hunger. Sports, after all, are just a distraction from reality. But I digress.
We’re on the edge of potentially historic Fed intervention due to today’s market chaos. As we noted in a recent Investing & Money piece, any Federal Reserve move could leave one side of the aisle disgruntled. Yet, the markets, embodying the collective wisdom of experienced investors, seem to be smarter than the Fed. Perhaps it was never really a binary choice for the Fed, politically speaking.
Overnight events in Asia, particularly Japan, sparked today’s market selloff. The yen’s unexpected rise triggered a reversal of the popular “carry trade,” where investors buy riskier U.S. assets with cheaper yen. With the yen’s rise and recent poor U.S. economic data, this trade is under pressure, contributing to the market’s fall.
Tech stocks are also dragging the market down. Overenthusiasm for artificial intelligence may have led to a tech bubble. Warren Buffett’s Berkshire Hathaway recently disclosed it had cut its Apple holdings by nearly half, causing Apple’s stock to drop about 3%. Brian Burrell, a portfolio manager at Thornburg Investment Management, commented, “Buffett’s moves always catch attention due to his track record of contrarian investing.”
So, will the Fed intervene before its scheduled September meeting? It’s possible, though not highly likely. Emergency rate cuts have happened before. In March 2020, the Fed made two emergency rate cuts in response to the COVID-19 pandemic. The federal funds rate dropped to near zero, leaving little room for further cuts.
Jeremy Siegel, the “wizard of Wharton,” is advocating for an emergency rate cut, citing several factors:
- The fed funds rate should be between 3.5% and 4%, according to Siegel.
- The Fed recently kept rates at 5.25% to 5.5%.
- Friday’s jobs report showed slower growth and an unemployment rate rising to 4.3%, the highest since October 2021.
Siegel suggests a 75 basis point cut now and another in September. The unemployment rate at 4.3% exceeds the Fed’s target, and inflation is close to the 2% goal. Siegel’s call for cuts echoes on Wall Street, with Chicago Fed President Austan Goolsbee stating, “If the economy deteriorates, the Fed will fix it.”
Futures markets seem to agree, now implying the Fed will cut rates to 4%-4.25% by year’s end. This requires 1.25 percentage points in cuts over the next meetings. We believe if an emergency rate cut is coming, it will happen this week or not at all.
