FOMC on Tap Tomorrow to Cut Rates

Yield Curve Steepens

The FOMC is widely expected to deliver another 25bp rate cut tomorrow afternoon, which will take the Fed Funds rate range down to 4.25/4.50%. This really shouldn’t be a surprise considering the global central banks are pretty much on board here all around and anyone watching Chinese bond yields now, well lets just say they have collapsed! What is going on? What does it say about global yields in general?

Well, for one, we know the yields and debt levels have to be inversely correlated or the system blows up. Yes we can raise rates for a short period, but we all know ZIRP is the only logical outcome. We have said it time and time again, HIGHER RATES IS INFLATIONARY!

We catch a lot of crap for this but our data and logic is sound, so we don’t care. A simple way to look at modern monetary mechanisms is to take the TBill rate which is 4.5% and multiply it by the total deposits, which is around $17.7T, that is $796.5Bn in risk free potential interest…that is inflationary….now cut the TBill rate in half, and then you will see the 50% reduction in that net risk free interest! That is deflationary…It really is the easiest way to view our fundamental rational as to why interest rates need to come down to combat inflation not rise.

I know we will hear that lower rates = more margin borrowing, yea ok, but the reality is that game is played regardless of the interest rate because collateral is in excess supply due to the FOMCs doubling of their balance sheet!

Ok so with that said we are certain the FOMC will continue the reduction in Fed Funds which has already forced the bond market to reSteepen the US yield curve. Here take a look at a few charts this first one is today’s current curve in yellow compared to the Highs and Lows over the last year and a half: