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Fight the Fed


"Don't Fight the Fed" is one of those things that I have heard so many times in my life. What it means is don't bet against the Federal Reserve Board. This advice is generally correct, but not right now!


The Federal Reserve Board, the U.S. central bank, is based in Washington, D.C. It is currently led by Jerome Powell, who was appointed by President Trump to the position of Chairman in 2018, over six years ago. President Biden reappointed him in 2022. He joined the Board of Governors in 2012. Prior to serving the Bush Administration as an Assistant Secretary, he worked as a lawyer and investment banker in NYC.


There are 12 Federal Reserve District: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco. The Federal Open Market Committee consist of 12 members. These include the 7 members of the Board of Governors, the NY Federal Reserve Bank president and a rotating four other presidents. Here are the current members:

There were 8 scheduled meetings for 2024, and the sixth one concluded yesterday. The FOMC voted 11-1 to cut the Federal Funds rate by 0.5%. It now targets 4.75% to 5.00%. Chairman Powell had hinted that the Fed would be cutting rates, and this was the first cut since March of 2020. Then, the FOMC had three meetings, two of which were unscheduled. The first was on March 3rd, and it cut rates by 0.5%:

Thirteen days later, it lowered them to zero!


The pandemic caused havoc in so many ways. We aren't yet five years past its onset, but it has faded in terms of impacting us in so many ways. The low rates that we had were kind of a flashback to the Financial Crisis of 2008 and reminded me of Japan, where rates stayed very low for a very long time. This is what the Fed said yesterday:

As I have discussed previously, rates were already very low. On 4/15, I discussed the inverted yield curve, and rates were much lower yesterday than they were then. This is what happened through yesterday on the close for U.S. Treasury securities:

  • 2-year: 4.90%-->3.62%

  • 5-year: 4.56%-->3.49%

  • 10-year: 4.52%-->3.71%

  • 30-year: 4.63%-->4.03%

After the rate-cut to 4.75-5.00% for overnight funds, the 2-year Treasury Note yields more than 1% less than the overnight rate, which implies more rate-cuts to come. The 5-year Treasury Note yields even less.


The federal government cares about Treasury Yields, as it borrows a ton, but most Americans, whether investors or borrowers, care more about corporate borrowing rates or mortgage rates. Those types of securities trade at a spread above Treasury rates, and the spreads are not abnormally high. If Treasury rates are low, then they are as well. I saw today, for example, that mortgage rates of 6.09%, according to Freddie Mac, have fallen to their lowest level since February 2023.


Some, especially the younger folks, may think that 6% is very high, and it is compared to how low it got after the pandemic, but those who look at a longer period of time know that 6% is very low historically. I can remember in 1986 when the 30-year Treasury broke to a new low of 8%, and mortgage rates were higher then.


I believe that our economy is in big trouble, and the Federal Reserve can't fix it by cutting rates. First, many rates are already low. Second, things take time. I don't believe that there are many people who will benefit from the lower rates, as they weren't that high to begin with.


Yesterday, stocks actually sold off after the initial rally, but today they are higher. I am still cautious on stocks, especially large technology companies. Traditionally, stocks do better when the Fed cuts rates, but stocks are already doing very well! The market has soared since the pandemic crash, but we are up a lot from the peak right before the pandemic plunge: Here is the 5-year chart:

I am short and will stay short stocks. I recommend fighting the Fed!

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Alan Brochstein March 2024.jpg

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