So it looks like the Fed will finally cut interest rates in September, but how far will they cut them? And is it too late or too soon?
After decades of witnessing endless prophecy and fear about central banks and their next moves, I have come to a simple and clear conclusion: Who cares?
Sound heretical? Even crazy? If so, listen up. The evidence is overwhelming. Stocks don’t need rate cuts. Cut, hike, hold, the Fed’s actions mean very little to investors. What they say means even less.
Yes, many believe that central bank PhDs and institutionalized processes make them so important that their normative announcements and actions have large, inevitable ripple effects on markets.
No! It’s all voodoo.
Take wages, for example. The Fed people think that rising wages lead to inflation. Not at all! 50 years ago, Nobel Prize winner Milton Friedman proved that rising wages always accompany inflation, but never cause it.
That was the case this time around. Inflation began to spike in February 2021, finally reaching a peak of 9.1% in June 2022. Meanwhile, wages were actually falling in the first half of 2021, but then began to rise, reaching a peak of 6.7% growth in June 2022. Since then, inflation has fallen sharply, while wages have actually moderated more slowly. Most recently, inflation and wage growth were at 2.9% and 3.9%, respectively.
To summarise, inflation first, wage growth later – as always, and while inflation has slowed globally, wages have soared in the UK and the Eurozone.
In fact, central banks react much more than they cause things. (A uniform and flawed economic education promotes a kind of foolish groupthink where we all nod in agreement to one another without any idea what’s going to happen next.)
Take for example “forward guidance,” where central banks signal future policy changes to avoid surprises. This guidance is meant to provide transparency, but it can cause confusion if central banks later deviate from it, as they often do.
Example: In May 2022, Chairman Jay Powell said the Fed was “not even considering” raising interest rates by 75 basis points. And that’s the amount they actually raised. next month …and then the next 3-4 months. Oops!
This is not unusual. The European Central Bank said publicly that it would not raise rates in 2022, but then raised them by 50 basis points in July that year, and three more times since then, with six more hikes in 2023. The Bank of England has also reversed course twice this cycle. Banks change course frequently, and they have always done so.
It’s not all down to stupidity. The global economy is complicated. Data varies. Interpretations change. Things happen. But if central bankers don’t know their next move, how do you know? You can’t. And yet pundits foolishly scrutinize policymakers, looking for clues, analyzing their words and body language, and even trying to read into their silences.
Don’t bother. Even if you could, it wouldn’t help. Think about it: commercial banks borrow short-term funds to fund long-term loans. Raising interest rates is intended to raise funding costs for banks, cooling lending, GDP growth, and inflation.
In this cycle, as I explained in my December 2022 column, a global deposit glut has kept funding costs for banks very low, negating the power of interest rate hikes. and The logic behind them (and the logic behind the current cuts) is that lending growth will therefore continue at a moderate expansionary level.
Does our economy need cuts? Apparently not. U.S. GDP has grown for eight consecutive quarters. Europe’s recovery began long before the first cuts.
Stocks don’t need a rate cut, either. To be sure, fears of rate hikes contributed to their selloff in 2022. But the S&P 500 is up 59.5% from its October low before the sixth straight rate hike. And in 2024, stocks have soared as expectations of rapid rate cuts have crumbled.
The European Central Bank will begin raising interest rates from July 2022. Eurozone stock prices fell 38% by the time of the first interest rate cut in June this year. On top of that The level before the rate hike. The Bank of England raised interest rates 14 times between December 2021 and the rate cut in August this year. During that time, British stocks rose 24% in pound terms.
With interest rates rising this much, there is no need for rate cuts. Despite the “high interest rates” argument, the current Fed Funds rate and 10-year Treasury yield are quite normal over the long term historically. The short-sighted fail to realize this.
So don’t worry about whether central banks are hawkish or dovish. It’s all nonsense. Enjoy this bull market.
Ken Fisher is founder and chairman of Fisher Investments, a four-time New York Times bestselling author and writer of regular columns in 21 countries around the world.
