Fed’s 50: Market Insights into Sep 19, 2024

On Wed Sep 18th the FOMC cut interest rates by 50 basis points. While there was about a 55% chance that was going to happen, heading right into the meeting, that means there was a 45% chance that it would only be a 25 basis point cut. I think a lot of market participants assumed that they would land at 25 because 50 might signal something looming or bad to investors.

I specifically shared in our members Facebook group that I think they should cut 50 and that they should do that today because they need to catch up on the work they didn't do in July, especially based on the August 28th revised jobs data, which shows that the past year of jobs was over-reported by about 818,000. 

What followed the rate cut was a quick spike higher in the broad market, then a drop lower, and then a lot of essentially sideways action as Chair Powell gave his press conference. Below I explore my key takeaways, referring back to the written notes I took while listening to the rate cut announcement and press conference:

Recalibration

One of the biggest themes was in Chair Powell using the word recalibration. And when you recalibrate in a scientific way, you are generally making small adjustments waiting to see how that goes and then adjusting again. But because the Fed has been so data-driven (until today), and the data by design is lagging, it puts us in a situation where they're starting to turn the ship, but I'm not 100% convinced that we already cleared the iceberg that may be underneath. 

Now I'm not calling for a recession starting immediately or that anything dramatically bad is going to happen. What I do think though is that the economy is not just 100% strong as Chair Powell also mentioned a few times. 

Bifurcated Economy

I think the economy is bifurcated, having a two-lane situation. 

→ In one lane are folks who are happy that inflation has slowed down, and while high prices can remain, they don't really affect their day-to-day life purchases or activities.

→ In the other lane is those who have still think hard about buying eggs or bread because even though inflation (the rise of prices) has slowed, the prices are still high. And their paychecks and savings are still not stretching as far as they used to. 

So I find it interesting that the Chair of the Fed doesn't address the fact that our economy is not the same for every person in every socioeconomic level and that it's actually, like I said, really two main buckets now and how the economy is going from your point of view depends on which bucket you're in. 

Neutral / Terminal Rate

What's the neutral rate or terminal rate that the Fed wants to cut rates down to? And as Chair Powell himself said the neutral rate is probably higher now than it was back then. So even though there may be more cuts ahead, some are saying as much as 100 to 125 basis points this calendar year in total, it doesn't necessarily mean we'll have a cutting of rates over a long duration the way that we saw the hiking of rates in response to the inflation that kicked up after COVID relief funding and supply chain constraints. 

Labor Market Conditions

While Chair Powell must have said at least three times that the labor market's in solid condition and this policy move was to keep it there, I question what exactly he's basing that strong labor market on. 

I personally don't think that government-created jobs should be such a key factor in looking at the labor market because frankly the government can create and remove jobs relatively easily and in large numbers. The private sector though can't do that, and the private sector is what's really driving our actual economic health and GDP. Government jobs are not directly tied to GDP output. So I would like to see the Fed take a closer look at what type of labor market they're talking about. 

Again, just like the bifurcated economy, maybe there's a bifurcated labor market here, right? Government jobs versus non-government jobs and really dig into those numbers because again hearkening back to that August 20th report of this major, major miss on jobs over the past year, we may be already kind of behind on making adjustments based on labor market conditions. 

Easing Inflation

Last but not least, inflation has eased is something Chair Powell shared multiple times and yes, it has eased but prices are still high. So I'm not quite sure that the Fed is continuing now to prioritize low inflation and a good job market in the same way. They seem to possibly be shifting gears a little and tilting more towards the job market, but again, they have a difficult job. I'm not trying to critique what they do outright. I just think that the sources of data are not as black and white as we think they are. 

Chair Powell himself referenced the jobs numbers update from August and even used the words artificially high and they will be revised down. But the problem is decisions were already made on that data.

It's like in our trading world. When a company reports earnings and earnings get revised later based on follow-up data. That's why my friend and mentor Ralph Acampora would always start every class in technical analysis by saying “earnings get adjusted, price is fact.”

So how do you navigate from here? 

Well, come back to that price is fact or as I like to say in my Gann 2nd edition book “price is king”. No matter what other factors are out there, the economic data, the changes to the Fed, the yield curve, come back to the price action of whatever it is that you are trading and stay on top of it because it's going to capture the most of what is influencing that market and that's how you should base your decisions. 

Of course, there are other pieces of information outside of price that can be extremely helpful to study. In my case, this fits into my trifecta of price, time, and momentum. 

Timing AKA market forecasting is doable on any time frame and in fact, I was forecasting on the one minute chart live while the Fed releases statement and news and while the press conference was going on. This doesn't mean I was trading but it just means I was applying Lost Forecasting techniques and more to kind of get a sense of where the short term movements might go:

And then the other part of the trifecta is momentum. That’s the speed behind the price moves, how fast or slow they may go and it is such a fantastic way to give you a heads up on market turns. 

So because this important Fed release was today and the markets will need time to digest it, I have scheduled a momentum tune-up on Thursday, September 19h for anyone who has our Four Zones RSI Coverage System course. This is the first course that we recommend in your study when you're brand new to our Tribe. It's the one that we offer to you first and if you don't have it already, keep an eye on your email so that you can join that course and join me in this very important session on Thursday, September 19th. 

With all that, continue to get your own information out of the markets. Of course, what I share can help you process what's out there but learn to be your own source. That's what my father taught me and that's what I'm continually trying to translate to you.

I look forward to seeing how these markets unfold, especially with the remaining data between now and the election!