• 288 days Will The ECB Continue To Hike Rates?
  • 288 days Forbes: Aramco Remains Largest Company In The Middle East
  • 290 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 690 days Could Crypto Overtake Traditional Investment?
  • 695 days Americans Still Quitting Jobs At Record Pace
  • 697 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 700 days Is The Dollar Too Strong?
  • 700 days Big Tech Disappoints Investors on Earnings Calls
  • 701 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 703 days China Is Quietly Trying To Distance Itself From Russia
  • 703 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 707 days Crypto Investors Won Big In 2021
  • 707 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 708 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 710 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 711 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 714 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 715 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 715 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 717 days Are NFTs About To Take Over Gaming?
How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

Another Retail Giant Bites The Dust

Another Retail Giant Bites The Dust

Forever 21 filed for Chapter…

Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

  1. Home
  2. Markets
  3. Other

Will the Fed Continue to Cut Rates?

It seems like the hot debate on the upcoming Fed meeting is whether or not they will cut the discount rate. Given that we had a cut in August, I'm not sure if we will see another cut in September. But, I can tell you that at present the charts do in fact say that we have entered into an environment in which rates will continue to be cut over the longer-term. Here's why.

Below is a chart of the 3-month T-Bill going back into the 1940's. I have also plotted my Trend Indicator along with price. Note that when the Trend Indicator turns, it signals or confirms major trend changes for interest rates. Given that this indicator has recently turned down, all indications are that interest rates are now headed lower and this outlook will not change until the Trend Indicator turns back up.

Now I want to show you another chart and discuss a widespread market myth. It seems that many people are of the opinion that the Fed dictates or sets interest rates. I realize that you can't see enough detail in the chart below to see this for yourself, but when looking at this chart up close I can tell you without a doubt the market in fact determines the interest rates and the Fed actually follows the market.

In going back to 1946 the market has lead the Fed at every major turn in interest rates. Yes, the market leads and the Fed follows. The latest example of this occurred during the 2000 to 2004 timeframe. In November 2000 the 3-month T-Bill was at 6.22% and the Discount Rate was sitting at 7.50%. By January 2001 the T-Bill rate had fallen to 5.70%, which widened the spread between the Discount Rate and the T-Bill rate from 1.28% to 1.80%. It was at that time that the Fed began cutting the Discount Rate and they continued cutting the Discount Rate as they followed the rates lower as was being set by the market. The 3-month T-Bill rate finally hit bottom in June 2003 at .82%. From there rates stabilized and rose to 1.39% in June 2004. It was then in July 2004 that the Fed began raising the Discount Rate once again as they followed the natural tendency of the market. As T-Bill rates and interest rates in general steadily rose from mid-2004 into early 2006 the Fed continued following suit with higher rates. As the 3-month T-Bill stabilized at around 5% from mid-2006 into mid-2007, the Discount Rate was left unchanged at 6.25%. It was not until the drastic drop in rates seen in August that the Fed stepped forward for another rate cut.

Since August the short-term rates have recovered and perhaps the sharp drop was just an anomaly and perhaps interest rates will stabilize. But, in the meantime my Trend Indicator remains negative, indicating that a major trend change has occurred. If this was just an anomaly then the Trend Indicator will ultimately turn back up. Until such time we have to play the cards based on the last hand we were dealt and that hand turned the Trend Indicator down. So, until this changes we can now only assume that we have in fact seen another major trend change in interest rates and that the bias now is toward lower rates. Does this mean that the Fed will cut in September? Given that the 3-month T-Bill has recently rebounded from 2.85% back up to around 4.6% it is possible that the Fed may choose to sit tight in the September meeting. But, as long as the Trend Indicator remains negative any bounce in interest rates has to be viewed as a counter-trend move. In which case the current rebound is not expected to continue and once rates begin to decline again we should then see the Fed following the lead of the market. The bottom line is that we have now entered into an environment in which we can expect future cuts in the Discount Rate. It is extremely important to watch the Trend Indicator as well as the Cycle Turn Indicator in regard to the future trend of interest rates as this will let us know if/when this environment has changed.

Now let's assume for the moment that this was not an anomaly and that interest rates do continue lower. The market place will look at this as if the Fed is saving the day, when in fact they are just following the market. Somehow the world has become fixed on the perception of the Fed's actions toward cutting the Discount Rate rather than the reality. Nonetheless, this will not fix the sub-prime and other outstanding mortgage issues. These problems are not going to simply go away as a result of lower interest rates. Also, lower rates are not likely to fix the woes of the stock market this time around either. I warned of the housing top in late 2005. I have been warning that the stock market has been in one of the longest 4-year cycles in stock market history without the required and natural correction. We are only just beginning to see the unwinding. You have been warned.

I have begun doing free Friday market commentary that is available to everyone at www.cyclesman.com/Articles.htm so please begin joining me there. Should you be interested in analysis that provides intermediate-term turn points utilizing the Cycle Turn Indicator on stock market, the dollar, bonds, gold, silver, oil, gasoline, the XAU and more, then please visit www.cyclesman.com for more details. In the September newsletter I also provide specific details about the 4-year cycle and what is expected on even a longer-term basis. The rally that began on August 16th was expected and the key now is what the Cycle Turn Indicator does. A subscription includes access to the monthly issues of Cycles News & Views covering the Dow theory, and very detailed statistical based analysis plus updates 3 times a week.

 

Back to homepage

Leave a comment

Leave a comment