The Federal Reserve’s latest rate cut has left markets reeling, and for good reason.
As I see it, Fed Chair Jerome Powell is digging a hole that’s going to be hard to climb out of.
Let me explain.
The Fed’s Misstep
Just yesterday, Powell cut rates again despite warning that we may not be able to do so next year. Here’s the problem: bonds aren’t buying it.
If you look at the bond chart, you’ll see prices have been dropping steadily since September, signaling that inflation isn’t under control.
Bonds are essentially saying: “Inflation is here, it’s getting worse, and rates need to go up.”
Meanwhile, Powell’s rate cuts are giving mixed signals. They might offer temporary relief for certain sectors, like housing (existing home sales rose briefly thanks to the cuts), but they’re also fueling higher food prices and persistent inflation. And when the Fed finally acknowledges reality, we’re likely looking at higher rates next year.
Market Reaction So Far
Yesterday, the market tanked on this news. Today, it’s in a state of consolidation, trying to process what happened. It’s a typical pattern: big moves followed by a pause as traders reassess.
But here’s the kicker: GDP came in higher than expected, and I’ll bet PCE will follow suit. The Philly Fed Index, which tracks manufacturing activity, has already gone negative, signaling a slowdown. Yet consumer spending remains strong for now, which means inflationary pressures aren’t going anywhere.
What’s Next?
All eyes are on tomorrow’s PCE report (Personal Consumption Expenditures), a key inflation measure.
It’ll tell us how much consumers are spending and whether prices are still climbing. Along with consumer sentiment data, it’ll give us a better sense of whether the Fed’s latest moves are helping or hurting.
For now, the big takeaway is this: don’t trust the Fed’s narrative. Inflation isn’t under control, and the bond market knows it. Be prepared for more volatility as the market adjusts to this reality.
Stay tuned. Things are just getting started.
— Geof Smith
P.S. It might seem chaotic out there, but one thing I focus on to target income from the markets — every single week — is this strategy right here.
