Fed Funds Rate does Not need to be Lowered (it's a Market Charade)

By Asseged Major

​There has been a Charade in High Gear the last couple of months in Financial Markets, to push the False Assumption that the US Economy is weakening and heading to a recession in order to obtain Low Interest Rates from the Federal Reserve Policy at the Fed Funds Rate. In the Start of the year the pricing in the Markets was extremely high pricing at 7 Interest Rate Cuts , than 1 to 2, and now back up 4 to 6 Range. Markets do go into phases of irrational thinking of overpricing and underpricing, and those cane be advantageous for Investors to take advantage against the Market. But over the last couple of months the amount of Misleading Assumptions and Bias has been extremely exacerbated. This is particularly important if there are the possible effects of an actualization of Interest Rate Cut(s) that are not needed for an already warm Expanding Economy, which can further Escalate Inflation and make it worse. Below is the overwhelming evidence that no interest rate cuts are needed (in fact strong case for it being raised), and the recent claims that are pushed through headlines which are weak in merit.

Claim : the Job Market is weakening and the Economy is heading to a Recession

​On August 2nd, the July Jobs Report came in at + 114,000  , it did come in under the forecasted amount + 176,000 , but + 114,000 is typically considered an okay to good jobs number for a month. It ultimately did get revised to a decrease -23,000 Jobs, to a total of + 89,000 Jobs added for July (More on Larger Revisions later). This is not a recession level indicating a number where it would be actually Negative, even with that it would have to happen for consecutive or multiple months. Moreover, a reason, some Economists said it came in less than forecasted, is because the timing of the Natural Disaster in the South Region “Hurricane Beryl ”  which happened in early July, correlated with a Huge Increase in Temporary Layoffs of Workers for July, which is counted as unemployed for the month of July. But it is temporary, and these workers will be called back to work, and if called back in August, can be recaptured for the job data for August. August Jobs Report came in at + 142,000 Jobs added (non-revision).

By looking at the Job Numbers for 2024 so far (Table 1), out of the 8 Months reported, 4 Out 8 were above 200,000 Jobs added. The Federal Reserve Long Term Equilibrium Target for a normal market in the Economy is between 70,000 - 90,000 Jobs added per month. Recent Jobs Numbers are still substantially above the Federal Reserve Long Term Equilibrium Targets, and they just reflect a more return to more normalizing values. This is nowhere near a Job Market that is showing signs of weakening and giving indications of a Recession !....., This is quite the overaction of the Financial Markets and quite dumbfounded. The data portrays quite the opposite, a relatively stable and strong Job Market. 

(US) Non-Farm Payroll Report - Monthly Jobs Added (Table 1)

( Source : Bureau of Labor Statistics, Federal Reserve Bank of San Francisco )

Claim : Revision of Jobs Reduced 2.9 Millions Jobs Created to 2.1 Million Jobs

The Bureau of Labor Statistics publishes a revisions report  for 12 Month rolling job data from March of last year to March of this year. They published this report in August. When this Report came out on August 21st, the Revision was larger than normally. There was an 818,000 decrease in Jobs that was revised on their report from March 2023 to March 2024. In total for that period, it went from 2.9 Million Jobs created to the revised 2.1 Million Jobs created. The average monthly Jobs Added went from 242,000 Jobs added per month to a revised 174,000 jobs per month. But for this time, this latest published Report is Quite Misleading ! . The last 2 years there has been a much larger migration of immigrants into the population than normal, there has been an estimated 3.3 Million immigrants that entered into the Population between 2023 and up to as of date in 2024. Out of this, the CBO estimates 1.3 Million are undocumented immigrants. The BLS Revision of the Jobs Report is based on counting workers that pay Unemployment Insurance (UI), the undocumented immigrant workers are not covered by Unemployment Insurance (UI), so therefore the BLS Revision Report is leaving out Undocumented Immigrant Workers from their Jobs Data. When taking into account Undocumented Immigrant Workers , the revision of the BLS Jobs Data reduction is likely a lot less. A report from Goldman Sachs estimates that when counting Undocumented Immigrant Workers, the revision would likely be just a reduction estimate of 300 K jobs, instead of 818 K Jobs. This would equate to a reduction of 25 K jobs a month from the Original Jobs Data for this period (March 2023 to March 2024). In other words, the estimate when counting undocumented workers, that there were around 2.6 Million Jobs created in this period instead of 2.9 Million, and there were between an Average Monthly Jobs added between 215 K to 220 K jobs a Month in this period, instead of 242 K Jobs per month. This is larger and a much more accurate number than what was reported of the revision of the BLS at 174 K Jobs added a month and 2.1 Million Jobs for the period. Also, even though the Revision Report of 174 K jobs a month is inaccurate, to give context in that level, which was around the average number of jobs added in 2019 before the Covid Pandemic in which the unemployment rate was also at around historical low level at 3.5 %. So even with that number, which is inaccurate, that gives you context of the quite strong labor market historically.  
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​( Source : Bianco Research , Federal Reserve Bank of San Francisco )

US Economy Continuing Solid Positive Growth

​On top of this, the current overall US Economy is not reflecting an economy that is slowing and is heading into a recession. The US Economy is showing quite the opposite in this as well. For Quarter-to-Quarter Growth, in the 1st Quarter it grew + 1.4 % growth, and in the 2nd quarter it grew + 3.0 % . To give you context the current 10 Year Real GDP Growth Average is about 2.0% . On an Annual Growth basis, the 1st Quarter GDP Growth was 2.9 % and 2nd Quarter GDP Growth was 3.1% . Current data received so far for the GDPNow Estimate by the Federal Reserve Atlanta Bank of Atlanta Released today Sept.17th, show another + 3.0 % GDP Growth for the ongoing 3rd Quarter. These are not values that the US Economy is showing to be or shown to be in a recession ! it is showing literally the opposite in displaying very good GDP Growth ! an Economy that is continuing to Expand at a very good growth rate ! 

US GDP Growth (Table 2)

( Source : Bureau of Economics , Federal Reserve Bank of Atlanta GDPNow , Date : Sept.17 , 2024 )   

US Consumption Continues to Grow

The US Economy is majority based on Consumption, 67 % of US GDP is based on Consumption. The recently released Consumption data by the BEA also includes the first month of 3rd Quarter, which is the July data. It is showing a continuation of strong consumption data for the US Economy as Macro Financial Researcher “ Wolf Ritcher ” points out. Consumer spending adjusted for inflation increased 0.39 % from June to July. This is a continuation of strong consumption growth from May and June. The 3 Month average growth from May to July, increased also by 0.39 % , this is the highest growth since February 2023 and second highest since November 2021. On an annualized basis this three-month growth adjusted for inflation is 4.8 %, meaning 4.8 %  higher than last year at the same time . Year over Year, July Consumer Spending growth grew 2.7 %, which also was the same for May and June. For each of these 3 months, it was the highest Year over Year growth rates since November 2023 and February 2022.  ( Source : BEA, Wolf Ritcher ) 

Inflation Rate

Two categories for inflation readings are the Nominal Inflation Rate and the Core Inflation Rate. The Nominal Inflation Rate includes the volatile Food and Energy prices, the Core Inflation Rate takes out and excludes the volatile Food and Energy prices. For that reason, Interest Rate policy by Government Central Banks put a much heavier weight on the Core Inflation Rate Statistic. The target that most developed countries Government Central Banks target Inflation for is a  2.0 % Core Inflation Rate.

The CPI Inflation Rate is the inflation rate that is most valued in Financial Markets it is released during the first week of the following month, and most world Central Banks use the CPI Inflation Rate, and it has a set basket of goods that are used. The Federal Reserve in addition also uses the PCE Inflation Rate statistic to target Inflation Rate. This Inflation allows substitution, meaning if a basket of Goods is substituted, for example if a food item Chicken has increased in price, it can be substituted with the Beef which is a lesser price item, consumers may have switched to beef because it’s a lesser price item, the price of Beef may have increased but at a lesser rate than the Chicken Food item. The PCE Inflation Rate comes out much later than the CPI, during the end of the month and usually has less impact on Financial Markets, on average there usually is a .04 % difference between the two inflation statistics, where the PCE Inflation Rate is usually .04 % lower than the CPI Inflation Rate.
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The CPI Inflation Rate latest reading  for August in the United States was a 3.2 % Core Inflation Rate, and a 2.5 % Nominal Inflation Rate. The Nominal Inflation Rate has experienced decrease due to the current lower oil prices at the moment, but could possibly quick change of its ability to be volatile. The latest reading of the PCE Inflation Rate, which is for July, produces a Core PCE Inflation rate of 2.6 %, and a Nominal PCE Inflation Rate of 2.5 % . Both Core Inflation Rates have not decreased enough to reach the Federal Reserve 2.0 % Inflation Target level. Look at table 3 below, 

CPI Inflation and PCE Inflation ( Table 3 ) 

​The Core CPI Inflation Rate is 3.2 % as of August 2024. It has roughly been the same the last 3 months, and has not changed the last 2 Months, Look at Table 4 below, 

Core CPI Inflation ( Table 4 ) 

​The PCE Core Inflation Rate has stayed the same at 2.6 % for 3 consecutive months, from May - July. Look at Table 5 below, 

Core PCE Inflation ( Table 5 ) 

The Nominal PCE Inflation Rate in February was 2.5 %, and the latest reading of July is 2.5 % . It experienced higher levels and decreased, but overall, it has meant it has returned back to the same level in February 2024 in the latest reading of July 2024 (as noted, a change in volatile oil prices and food can quickly change it back to the core inflation rate) . Look at Table 6 below, 

Nominal PCE Inflation (Table 6)

( Source : TradingEconomics )  

Services Inflation Remains High

​As reported in the CPI Services Inflation report, the United States Service Inflation for August is 4.90%. This far exceeds the 2.0 % range where it has been mostly for the past 10years , Look below at Chart 7 ,  

US Services Inflation Rate (CPI) - Chart 7 

As for reported in the Core PCE Services Inflation Report, the Services Inflation accelerated from 3.72 % in the month of July.
( Source : BEA )

Rent Inflation remains High

Rent Inflation for August 2024 was 5.2 % in the United States. This also exceeds the 3.0 % Range where it was for the past 10 years. Look at Chart 8 Below, 

US Rent Inflation (CPI) - Chart 8

Corporate Borrowing continues to Increase

Corporate Borrowing has been continuing to increasing despite a Higher Feds Funds Rate ! . As of August 2024, a + 31.3 % Year over Year increase at $ 1.34 Trillion, Look at Table 9 below, 

US Corporate Loans (Bonds) New Issuance - Table 9

Data : SIFMA (Securities Industry and Financial Markets Association)  

Despite where a Higher Feds Fund Rate, the Spread for Corporate Bond Yields minus US Treasury Bonds, are at the Historical Low Range Levels ! . Currently the Spread of Investment Grade Corporate Bonds minus US Treasury 10 Year Bond is (0.96 %). This is at the very low end range historically. The same is being shown For Junk Bond Yields (High Yield) , which are more risky Corporate Bonds. The current spread for Junk Bonds (High Yield) minus US Treasury Bond is (3.32 %) . Look at Charts 10 & 11 Below, 

US Corporate Investment Grade Bonds Yield Spread 
( US Corporate IG Yield - US 10 Year Treasury Yield )
Chart 10

US Corporate Junk Bonds Yield Spread
(US Corporate High Yield - US 10 Year Treasury Yield)
Chart 11

Corporate Loans (Bonds) are showing the Fed Funds Rate is not Restrictive !

​It begs the question, How can the Feds Funds Rate be restrictive when the Corporate Bond Loans continue to make Year over Year Large increases, and the Spread for Corporate Bond Yields to US Government Bonds are in the Historical Low Range Level ???

Money Supply in the US Economy is Increasing

Underlying this inflation picture, the United States Money Supply (M2) has continued to increase since October 2023, and it has reached in July 2024  to $ 21.1 Trillion Dollars. This has been the highest Money Supply Level since 17 Months ago ! . Look at Chart 9 and Table 10 below,  

US Money Supply (M2) - Chart 9

(Source : TradingEconmics.com)

Table 10 - Money Supply (M2)

(Source : TradingEconomics)

Meaning the Money Supply level in July 2024 has increased to near a level of what it was in February 2023, when the Federal Reserve was continuing to raise Interest Rates Higher. This is actually quite an alarming statistic, the purpose of the Federal Reserve by raising interest rates was to decrease the Money Supply to get rid of inflation. The Federal Reserve last raised the Feds Funds Rate in July 2023 and held it there, But in sum in the last 10 Months the actual Money Supply has increased Higher than what it was before July 2023 !, to the level of what it was in February 2023 while they were still raising rates ! . 

​This has caused the level of the Inflation Rate to act the way it is remaining sticky and elevated, and furthermore it supplies even more pressure for Inflation to increase going forward. The Federal Reserve target is to have a 2.0 % Core Inflation Rate before they attempt to cut interest rates. Clearly both Core Inflation Rates for the CPI and PCE are not at the 2.0 % Range, Core CPI showing 3.2 % , and Core PCE at 2.6 % . Added that there is an Increase in the Money Supply, this clearly shows any cutting of interest rates would fuel the money supply, and further heat up the US Economy with consumption and further escalate the Inflation Rate. 

What does this Really Mean for the Feds Fund Rate, Interest Rates and for the Economy ?

​Markets have some reasons to be volatile. It is the presidential election coming up, and the Federal Reserve has stated that the next Interest Rate Decision(s) is heavily data dependent. Fed Reserve Chairman Jerome Powell did give a very surprisingly Extra Dovish Tone to potentially lower interest rate sat Jackson Hole Wyoming meeting on August 23rd , there was nowhere in the speech it was a guarantee to lower interest rates and the timing of it like the market is pricing. That being said the Fed Reserve should of understood now based on what was exhibited from the early part of the year, if you give the Market 1 Inch, they will ask for 1 Foot, the Market has been wrong the Entire Year, the extreme amount of interest rate cuts from 7 to 1, back to now 4 to 6. What has stayed consistent throughout the process is the overwhelming Economic Fundamentals of the Overall Expanding Economy, and Strong Consumption, and Sold to Strong Job Growth, and the evidence of Core Inflation Still Very High. Add the mix of an Increasing Money Supply and increasing year over year Corporate Loans(Bonds) and historical low spreads. Do any of this sounds like the Fed Funds Interest Rate needs to be Cut ?? No, it does not, it sounds like and showing Quite the Opposite. Not only this shows there should not even by 1 Interest Rate cut right now, it leads to that the Feds Funds Rate is not Restrictive actually…., meaning it actually is not High Enough !!, it leads for the Fed Funds Rate to be raised, or at minimum for Interest Rates in the Capital Markets to be Higher. One thing for sure is that if Market receives what they want for the Fed Funds Rate at the low levels they are pricing it for, Consequences for Higher Inflation will Take Off Jumping !!! 

Disclaimer :
Paraimbal, LLC is a registered CTA & CPO ( Commodity Trading Advisor and Commodity Pool Operator ) with the CFTC (Commodity Futures Trading Commission) and NFA Member. This content is for informational purposes only. This information is of the opinion of Paraimbal, LLC and Asseged Major. This information is not mean’t to be investment advice. This is not a offer to participate in a futures trading program, pool or securities.

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