Rabobank Goes Apeshit On Powell’s Orwellian Rate Cut

Some hilarious, and absolutely spot on, excerpts from the reaction note by Rabobank’s Fed-watcher Philip Marey who clearly isn’t getting invited to the Marriner Eccles Christmas, pardon, Holiday party this year.

Here are the highlights from the report which equates what Powell said with the worst parts of 1984.

If there was a strong case for a 50 bps cut, Powell did not make it at his press conference. He repeatedly stressed that the US economy was strong, but we should see the strong move as a commitment to keep the economy strong.

• Doctor: “We’ll give you extra strong medication.”
• Patient: “Is my condition that bad?”
• Doctor: “No, you’re healthy, but we’re committed to keep you healthy.”

In the end, it looks like Powell felt the level of the policy rate was out of sync with the progress on inflation and the rise in the unemployment rate. After all, he used the word ‘recalibration’ several times. This was also evident in the FOMC projections now showing a 100 bps reduction compared to the pre-meeting level of the target range, rather than the 25 bps in the June projections. Although Powell denied that the Fed had fallen behind the curve, this is exactly what recalibration means. However, the latter obscures the former and Powell did not want to admit that they should have cut 25 bps in July. It got really funny when he said that the FOMC had been patient in waiting and this allowed them to make a strong move. Yes, if you get behind the curve, you have to make a big leap forward to catch up!

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The recalibration argument is clashing with the message this large cut sends. When asked during the Q&A what his message to the US consumer is, Powell said that the US economy is in a good place and our decision is to keep it there. Really? A 50 bps cut as a message that the economy is strong? So if they cut by 75 bps the economy is booming? This sounds like something out of George Orwell’s 1984:

• WAR IS PEACE
• FREEDOM IS SLAVERY
• IGNORANCE IS STRENGTH.

Understandably, a reporter asked whether the 50 bps cut meant that he was more concerned about the labor market than about inflation. However, Powell denied this and said that the risks are roughly balanced. This exchange underlined the problem.

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During the press conference, Powell had trouble clearly explaining the reason for the large cut, because he did not want to admit that this ‘recalibration’ was needed because the FOMC had fallen behind the curve. Meanwhile, the large cut seemed counterintuitive to the repeated claim that the economy was strong.

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In the past, the Fed only cut 50 bps at the start of a cutting cycle in case of a severe deterioration in the economy or markets, such as the dot com bubble and the Global Financial Crisis.

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• Powell had a clear incentive to deliver a 50 bps cut before Election Day, because Trump has already made clear that he would not reappoint him as Fed Chair. In fact, he may decide to remove him prematurely. So Powell’s only chance of another term is by pleasing Kamala Harris and her fellow Democrats in the Senate. In fact, on Monday three Democratic senators – Elizabeth Warren, Sheldon Whitehouse and John Hickenlooper – sent a letter to the Fed urging a 75 bps cut. However, the other voters in the FOMC should have seen the greater political risk to the institution from providing a jumbo cut without compelling support from the data or the forecasts just before the election. There was only one dissenter.

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Although Powell’s message was a mess, our argument for 50 bps would be the deterioration in the labor market that is likely to end up in a mild recession. However, by cutting 50 bps when you think the economy is strong, you may be wasting valuable ammunition if your assessment of the economy is right. What if there is a sudden deterioration in the economy or the markets, do we then get a 75 bps cut? Starting with 50 bps without compelling data or forecasts means that you are blunting your interest rate tool. Meanwhile, with a 50 bps cut the Fed is taunting former and possibly next President Trump. This could have serious repercussions next year. The sole dissenter, Michelle Bowman, may just have improved her chance of becoming the next Fed Chair.

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Looking ahead, if this was truly a recalibration and 50 has not become the new 25, we still expect 25 bps at each of the three upcoming scheduled meetings in November, December and January. As we have said before, what happens after January will to a large extent depend on the economic policies of the next administration. A Trump victory would likely lead to a universal tariff and a rebound in inflation that should stop the Fed’s cutting cycle in its tracks. A Harris victory would likely be less inflationary and give scope for additional rate cuts in 2025.

The full Rabobank report can be found here. We give the last word to Kyle Bass who, along with Donald Trump, said it best:

The @federalreserve ‘s large rate cut can be explained by only two scenarios:

1. Jerome Powell and his cadre of elite economists see the U.S. economy falling off a cliff…or

2. It’s a couple of weeks before early voting

— Kyle Bass (@Jkylebass) September 19, 2024

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