The Fed’s Rate Cut Is Handing Us Opportunity in This $27 Trillion Market

[Trading With Larry Benedict]( The Fed’s Rate Cut Is Handing Us Opportunity in This $27 Trillion Market By Larry Benedict, editor, Trading With Larry Benedict The Federal Reserve set off fireworks with its interest rate cut last week. Reuters polled 101 economists heading into the rate announcement. And 92 of them expected the Fed to cut rates by 0.25%. But the Fed surprised investors with a 0.5% cut. The last time the Fed cut by that much, the economy was in freefall during the pandemic. After the meeting, Fed Chair Jerome Powell made it clear that the focus is shifting away from inflation – as implied by the big rate cut. But turning away from inflation could impact other areas of the bond market. Today, let’s look at why outsized rate cuts could spook a $27 trillion market… and deliver trading opportunities along the way… Recommended Link [Introducing the 60-Day Profit Window]( [image]( Jeff Brown has discovered an unusual pattern in the crypto market. If you can spot it, it’s possible to make large crypto gains in 60 days or less – whether Bitcoin’s going up, down, or sideways. He’s sharing the details Wednesday, September 25th at 8 pm (ET) – including the name and ticker of his top buy. [Register here for free]( -- Will Inflation Rear Its Ugly Head Again? Congress tasks the Fed with keeping inflation and employment in balance. Adjusting interest rates is the Fed’s primary lever for fighting inflation or boosting the labor market. High interest rates slow the economy and labor market to bring inflation down. Lower rates have the opposite effect. And with last week’s rate cut, the Fed is declaring victory on inflation and switching its focus to employment. Yet have we truly defeated inflation? Yes, it has moderated significantly since peaking in mid-2022. That’s when the Consumer Price Index (CPI) peaked at 9.0%. It was the highest level in 40 years. Since then, inflation has fallen to 2.5%, just above the Fed’s 2% target. But core inflation isn’t trending in the right direction. (Core inflation strips out food and energy prices, which are susceptible to wild swings.) Core CPI has stayed stubbornly high at 3.2% for the past couple of months. The monthly pace of core inflation has even accelerated in the past two months. And the Fed’s sudden pivot to large rate cuts could stoke inflation once again. That could weigh on bond prices… and hand us trading opportunities. Free Trading Resources Have you checked out Larry’s free trading resources on his website? It contains a full trading glossary to help kickstart your trading career – at zero cost to you. Just [click here]( to check it out. Inflation vs. Bonds Back when inflation started accelerating in 2021, longer-term bond yields soared. You see, bonds pay a fixed coupon payment. When inflation picks up, that erodes the purchasing power of income collected from bonds. So bond yields tend to move higher when inflation is rising. Let me show you an example in the chart below: [chart] ([Click here to expand image]( From the start of 2021 to the end of 2022, CPI inflation rose from 1.4% to 6.5%. In response, the yield on the 30-year Treasury jumped from 1.65% to 3.97% over the same time (the shaded area on the chart). But bond prices move inversely to yields, which means prices tumbled. The iShares 20+ Year Treasury Bond ETF (TLT) tracks longer-term bond prices. It lost 34% of its value during the highlighted period. More recently, as inflation has come in, yields have fallen. But that trend could start reversing. In fact, longer-term bond yields moved higher immediately after the Fed rate cut. This could be a sign that inflation won’t stay in its grave. If the Fed cuts too much too soon, its “soft landing” could get bumpy. Yet as traders, that’s a sign to look for opportunities amid the transition. Rising yields just allowed my subscribers in The Opportunistic Trader to grab a 35.5% gain in just two days on TLT put options. And all else being equal, put options on TLT should continue to gain in value when bond prices are falling. (Similarly, we could use call options if bond prices turn around and start to rise.) So with the Fed bringing uncertainty back into the economy, I expect plenty more trading opportunities in the bond market ahead. Regards, Larry Benedict Editor, Trading With Larry Benedict P.S. In just a couple of days, tech expert Jeff Brown is sharing his latest passion project… an invention he calls “Perceptron.” This AI system is specially designed to spot opportunities in the cryptocurrency market. It looks for 60-day windows when a key pattern emerges… and offers profits to investors who are paying attention. During years of backtesting and real-world trading, it’s helped turn a series of $5,000 investments into $6,950… $9,090… $11,800… $25,700… and more. [And if you’re interested in learning more, he’s going to unveil the details on September 25. Go right here to make sure you don’t miss a thing.]( [The Opportunistic Trader]( The Opportunistic Trader 55 NE 5th Avenue, Delray Beach, FL 33483 [www.opportunistictrader.com]( To ensure our emails continue reaching your inbox, please [add our email address]( to your address book. This editorial email containing advertisements was sent to {EMAIL} because you subscribed to this service. To stop receiving these emails, click [here](. The Opportunistic Trader welcomes your feedback and questions. But please note: The law prohibits us from giving personalized advice. To contact Customer Service, call toll free Domestic/International: 1-888-208-6550, Mon–Fri, 9am–5pm ET, or email us [here](mailto:feedback@opportunistictrader.com). © 2024 Omnia Research, LLC. All rights reserved. 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