9/19/24 Roundup: Fed Cuts Rates: Another Turn of the Monetary Ratchet

TLDR: While equities spent the summer in limbo, the U.S. money supply emerged from its first annual reduction in supply since the great depression, with the Fed, Treasury, and Congress all conspiring for an even larger uninterrupted expansion that may rival the Covid-19 print.

Three reasons yesterday’s 50bps rate cut was different:

1) Externalities played a big role.

• • Currency volatility spurred by the unusual circumstance of U.S. rates being HIGHER than the majority of other sovereigns.
  • Namely, August’s currency volatility that rocked Japan’s equity markets and spilled over into global markets.
  • It was less about employment and price, more about global instability (Yen/ NKY) that ended up spilling over into U.S. markets.
  • The Fed’s unintended consequence of providing a profitable global arbitrage between the cheap Yen and expensive USD had to end.

2) Liquidity increased BEFORE rates were cut.

• • The U.S. money supply (M2) started to increase months before the cut, which is unusual, as shown in the Fed balance sheet reduction chart below.
  • The chart shows instances when the Fed reduced their balance sheet since 2002. Note the Fed reduced their degree of reduction starting this past March.
  • The reversal in balance sheet management is very different than the period leading INTO the 2008 GFC, when the Fed drained liquidity with asset sales from April 2008 to September 2008.
  • We believe the Fed has learned their lesson, that liquidity is needed to grease the inefficient, indebted banking and global financial system…well ahead of any rate cut.