Overview:

The Federal Reserve completed its September meeting and decided to cut the fed funds rate by 50bp (.5%). Significant items:

 

• The market knew the Fed would pivot and cut at this meeting. There was substantial debate regarding the size of the cut. I had expected 25bp (.25%). The doves in the crowd calling for the larger 50bp cut were correct.

 

• The Fed will continue its monthly quantitative tightening and will continue to shrink the size of its balance sheet (for now).

 

• The press release says the decision to cut 50bp was unanimous, but later in the release it notes that one Governor dissented and preferred a 25bp cut instead. I’ve read that this is the first Fed dissention in almost two decades.

 

• The new dot plot indicates the Fed expects to cut an additional 50bp by the end of this year, or 25bp at each of the next two meetings.

 

• Given the weaker employment data and the public comments by Chairman Powell, I’m not surprised the Fed cut today (no one is surprised at this point). I’m a bit surprised by the larger 50bp cut because the Fed tries to appear non-partisan and non-political in its actions. Today’s larger cut just 6 weeks before the November elections gives the appearance that they’re trying to help the Democratic candidates.

 

Analysis:

I’m probably in the minority here, but think this cut is unwise. While many claim that the US economy is already in recession, I’m concerned that inflation is still above the 2% target and retail sales remain strong. There are still almost 8MM jobs available which is more than the number of people seeking jobs. Most importantly, Congress is still engaging in trillions of dollars of annual inflation-causing stimulus spending. (For those of you on team red or team blue, I’m sorry to report that overspending is a bipartisan problem.) Most importantly, check out the graph below where we compare the inflation of the 1960s and 1970s with the more recent numbers. You can see where former Fed Chairman, Arthur Burns, eased rates prematurely leading to a resurgence of inflation. It looks like the Powell-led Fed just made the same decision.

 

In the end, my opinion of the wisdom of the actions of the Fed are not relevant. We get the market and conditions we get, not the ones we want. As usual, DKI will invest based on the market we have. Our portfolio is well-prepared for higher inflation over the next few years. It’s also important to note that recent DKI stock picks are high potential-return companies that I believe won’t be economically sensitive and can continue to grow revenue at a high level regardless of future Fed actions.

The market wanted rate cuts, but I think they should look at this chart.

 

Conclusion:

DKI has been unerringly accurate regarding inflation and the Fed over the past three years. We warned about large and non-transitory inflation in November of 2021. We shorted the market in early January of 2022 ahead of the first Fed rate hike. We owned gold, Bitcoin, and energy going into the big 2022 inflation spike which was the only long trade that worked. Dovish market participants have been calling for rate cuts since June of 2022 while DKI has spent the past two plus years insisting we’d get “higher for longer” and that while rate cuts would eventually come, they’d be later than most expected. I expected a 25bp cut today and was incorrect about that.

 

After three years of differing from market expectations, as of this moment, I don’t have a differentiated point of view. The Fed is saying 50bp of additional cuts by year end and I have no reason to doubt them right now. I’ll be watching Powell’s press conference and will report back if he says anything unexpected.

Until then, DKI will continue to uncover high-return individual stock ideas.

 

IR@DeepKnowledgeInvesting.com if you have any questions.

 

 

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