Brace for Impact: The Fed’s Panic Cut is a Sign the Worst is Yet to Come

Sell Signal for the Stock Market… [Morning Reckoning] September 19, 2024 [WEBSITE]( | [UNSUBSCRIBE]( Brace for Impact: The Fed’s Panic Cut is a Sign the Worst is Yet to Come Frankfurt, Germany September 19, 2024 [Sean Ring] SEAN RING Good Morning Reader, Yesterday, the Federal Open Market Committee (FOMC) shocked most market watchers, including yours truly, with an aggressive 50 basis point cut, a mostly unexpected move. The Fed's decision, which saw Governor Michelle Bowman dissenting, raises serious questions about the stability of the U.S. economy. The stark contrast between the cut and the rhetoric leading up to the meeting signals more than just a recalibration of monetary policy. It signals fear. For months, Fed Chair Jerome Powell and his colleagues have emphasized that inflation remains stubborn, necessitating tighter policy for longer. But the sudden 50 bps cut suggests the Fed sees something behind the scenes that has them spooked—and it should have the rest of us spooked, too. Let's break down why this move reeks of panic, what Bowman’s dissent tells us, and why this could be the sell signal that stock market bulls desperately want to ignore. Why the 50 Basis Point Cut is a Panic Move When central banks slash interest rates, especially by 50 basis points, they send a clear message: they’re concerned about economic growth. But this latest move from the Fed is even more telling given the context. Just weeks ago, Fed officials were touting a "soft landing" scenario where inflation would be tamed without severely damaging economic growth. The sudden pivot to cutting rates so aggressively indicates that this soft landing narrative is, at best, fantasy. There are a few reasons why the Fed might feel the need to panic: Recent economic indicators like GDP growth, unemployment, and retail sales have painted a relatively stable picture. However, the Fed has access to real-time data, which might signal a sharp downturn or severe financial strain in critical sectors of the economy. Corporate profits have been dwindling for several quarters, and while consumer spending has held up, cracks are forming under the surface. Perhaps Powell and his colleagues are privy to data suggesting that a recession is not just possible but imminent. Despite reassurances, regional banks remain under significant pressure. [Earlier this year, multiple regional bank failures caused a wave of uncertainty throughout the financial sector.]( The Fed’s emergency rate cut might be an attempt to cushion the blow to balance sheets that are teetering on the edge of collapse. If this is the case, the cut is less about promoting growth and more about preventing a systemic collapse. The global economy isn’t in much better shape. With China’s economy faltering, Europe teetering on the brink of recession, and geopolitical tensions escalating, the Fed might be responding to the possibility that global events could drag the U.S. down. A worldwide slowdown could be brewing, and the Fed’s move may reflect an attempt to insulate the U.S. economy from external shocks. But whatever the reason, a 50 bps cut at this stage isn't a preemptive move—it’s a reactive one. This suggests the Fed has waited too long and is now trying to play catch-up. When the Fed panics, investors should take note. [NOW STREAMING: Jim Rickards Emergency Election Briefing]( [Click here to learn more]( [Jim Rickards believes Donald J. Trump will win the 2024 election.]( If he's right, the next coming weeks could be complete and utter chaos in the markets. [Click here now to prepare NOW](. [LEARN MORE]( Why Bowman Dissented Fed Governor Michelle Bowman’s dissent is notable, especially given her hawkish stance in recent months. She and others have been clear that inflation remains too high, and cutting rates too soon would risk reigniting price pressures. So why did Bowman dissent, and what does it mean for the Fed’s credibility? Bowman has consistently argued that inflation remains a significant threat to economic stability. While headline inflation has cooled, core inflation—excluding volatile items like food and energy—remains elevated. By cutting rates now, the Fed risks fueling another wave of inflation, eroding our purchasing power and forcing them into an even tighter policy stance down the line. Bowman's dissent signals her concern that the Fed is prematurely declaring victory in the inflation fight. Bowman’s dissent might also reflect her discomfort with how quickly the Fed has shifted its stance. Central banks rely on credibility and clear communication with the markets. Rapid pivots like this erode trust and create uncertainty, leading to market volatility. If the Fed is panicking, Bowman’s dissent is her way of distancing herself from what she likely sees as a reckless course correction. Another reason for Bowman’s dissent could be the growing divergence between the Fed and other central banks. The European Central Bank (ECB) and the Bank of England are still cutting rates but hurried U.S. rate cuts risk tightening the rate differential and strengthening the EUR and GBP. This divergence may create a new wave of financial instability. Bowman’s dissent suggests a deeper rift within the FOMC, which shows internal disagreements on policy are more severe than the Fed is letting on. A Sell Signal for the Stock Market So why should stock market bulls be worried? A 50 bps cut might seem like a bullish move—it makes borrowing cheaper, boosts liquidity, and generally leads to rallies in risk assets. But in this case, the opposite could happen. Here’s why: The market hates uncertainty. The Fed’s sharp pivot creates more questions than answers. Why the sudden move? What data do they see that the rest of us don’t? If investors begin to question the Fed’s ability to manage the economy effectively, market volatility will spike. Without clear guidance, markets will be left to speculate on worst-case scenarios, which rarely ends well for stocks. A 50 bps cut at this stage isn’t a sign of confidence—it’s a sign that the Fed is worried about an imminent downturn. If the Fed sees a recession coming, it becomes how deep and prolonged it will last. Stock markets, pricing in a soft landing, are not prepared for a severe economic contraction. The cut may be the catalyst that sparks a broader market re-pricing. Regional banks have been under pressure for much of the year, and while lower rates might provide some relief, they also signal that the Fed is concerned about bank stability. If the financial sector takes another hit, it could cascade through the economy, impacting lending, consumer spending, and ultimately corporate profits. This is not bullish for stocks. By cutting rates now, the Fed risks significantly fueling a new round of inflation if the economy doesn’t slow as much as expected. If inflationary pressures reignite, the Fed may be forced to reverse course quickly, leading to an even more volatile policy landscape. The market doesn’t like uncertainty, and rapidly changing inflation dynamics create precisely that. Wrap Up The Fed’s 50 bps cut should be seen for what it is: a panic move. It signals that the central bank is far more worried about the economy’s state than it has let on and that internal dissent is growing. Bowman’s opposition suggests inflation risks are still very real, and the stock market should take heed. This isn’t the start of a new bull market fueled by easy money—it’s a sell signal. The road ahead is fraught with uncertainty, and investors who ignore the warning signs do so at their own peril. All the best, [Sean Ring] Sean Ring Contributing Editor, The Morning Reckoning feedback@dailyreckoning.com X (formerly Twitter): [@seaniechaos]( [Urgent: Claim Your Copy Of This New Book From America’s #1 Retirement Expert!]( [Click here to learn more]( Forget everything you’ve ever been told about retirement. According to [this new book]( – written by America’s #1 retirement expert – you don’t have to wait until you’re 65+… and you don’t need millions of dollars. [The strategy you’ll find outlined inside this book]( is completely different… All you have to do is tap into the little-known income streams revealed inside this book… And you’ll learn exactly how you can generate almost effortless income every month… instantly, in some cases! [And today, for a limited only, you have the chance to claim a copy of this book for just $1. Click here now to claim your special book offer.]( [LEARN MORE]( In Case You Missed It… Three Hot Breakouts to Watch Greg Guenthner, Editor [Greg Guenthner] GREG GUENTHNER Good Morning Reader, The rate cut cycle you’ve waited for is finally here! Yes, the Fed is finally cutting this week and the noise couldn’t be louder. Grab your earplugs! Trading could get a little wild as everyone jockeys for position heading into Wednesday afternoon. We’re even dealing with some interesting new wrinkles as traders debate just how much the Fed might cut tomorrow. Last week, it was looking like 25 bps was a lock. But now, the potential for a 50 bps cut is on the table. The probability of a 50 bps cut jumped to 49% following Fed whisperer Nick Timiraos’s claim that the FOMC rate decision remains a coin toss. The chance of a double-cut continued to climb Monday morning, registering as high as 59%. Either way, someone will be caught on the wrong side of this trade. Between the lightning-fast sentiment swings we’ve experienced since August and the intense expectations heading into the rate-cut season, we could see some serious market swings this week. Now’s the time to mentally prepare for whatever the world throws our way. Plus, there was yet another Trump assassination attempt over the weekend that’s already getting buried by the hyperactive news cycle. We have just 49 days until the election, but it might feel like a lifetime at this rate. As always, I like to try to ignore political nonsense – but this is nearly an impossible task heading into November. My only hope is that we get minimal market disturbances and that our pool of potential trades isn’t affected too much as the chaos spreads. While more of that dreaded uncertainty creep back into the markets this week, it’s not all bad news for investors. In fact, I’m seeing some downright bullish developments percolating under the surface of this market. A little positive momentum has found its way back into the market. We’re even starting to see some promising trade setups emerging. But I need to offer a few words of caution before you go out and buy every stock in sight: it’s only September. A few more blips of volatility are certainly possible before we enter what could be a more bullish period for stocks in October and November. Still, potential market leaders and snapback plays are perking up. And we have to be ready to take advantage of these setups! Despite everything going on in the world right now, it’s beginning to look like melt-up season is just around the corner. As we’ve discussed many times, we only get “ideal” conditions a couple of times per year, so we have to capitalize when we can. These are the times when breakouts extend (and overextend) and we are spoiled with more viable trades than usual. We’re not there yet. But I can feel it building… In fact, that pesky rotation trade is starting to extend. The Big Boys Fall Behind Last week’s rally was a solid bounce following the early September rout. Yet while the major averages are quickly approaching their all-time highs, the first-half leaders still have a lot of ground to make up. Don’t get me wrong – the mega-caps logged a nice snapback week. But the numbers haven’t budged following the four-day swoon that kicked off the month. While the Magnificent Seven names are off their lows, the Roundhill Magnificent Seven ETF (MAGS) still needs to run up another 11% before challenging its August highs. It’s an even steeper hill for the chip stocks, with the VanEck Vectors Semiconductor ETF (SMH) requiring a rally of more than 20% to overtake its own July highs. For the record, many of these big, popular stocks are nearing some excellent risk-reward levels for folks interested in buying the dip. They might not bounce tomorrow. They might not bounce next week. But if and when the market finds its way out of this seasonal weakness, these names could go on a tear as a fourth-quarter meltup emerges. Meanwhile, some of our former rotation trades are quietly beginning to firm up. To be clear, these are the same breakouts we were tracking back in the summer that reversed and subsequently failed heading into August. The charts have been messy at best, especially the small-cap Russell 2000. Yet after 10 volatile weeks, the iShares Russell 2000 ETF (IWM) is finally setting back up for a potential breakout extension. Back over the summer, it looked as if IWM was going to make another run following its early July thrust to 225 and fresh year-to-date highs. It failed to extend higher from there, opting instead for a nasty whipsaw move that was exacerbated by the Yen panic in early August. But a move back above 220 could finally trigger the next leg higher for small-caps heading into the fall. Keep an eye on this chart for an explosive move! Two More Breakouts in the Making… Small-caps aren’t the only group on the cusp of a big move. What about precious metals? Gold continues to quietly post new highs as it gets comfortable in the $2,600 range. Meanwhile, silver jumped nearly 10% last week – its best performance since May. So we shouldn’t be surprised to see the VanEck Gold Miners ETF (GDX) pushing back toward a breakout near $40. This is the same area where GDX ran into sellers back in 2020 and 2022. If it manages to post a clean breakout here, it’s off to the races. Then there are the big biotech names. The iShares Biotechnology ETF (IBB) has clawed back its early September losses and is now knocking on the door to a $150 breakout and its highest levels since late 2021. Again, these biotech names haven’t posted the smoothest trends this summer. But like the miners and small-caps, they’re setting up for potential market-leading moves should these breakouts materialize. Bottom line: Give the mega-caps and semiconductors some space over the next couple of weeks as precious metals, biotechs, and small-caps approach key areas. These “messier” trade ideas could quickly take on leadership roles and provide excellent trading opportunities heading into October. Best, [Greg Guenthner] Greg Guenthner Contributing Editor, Morning Reckoning feedback@dailyreckoning.com Thank you for reading The Morning Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Sean Ring] [Sean Ring, CAIA, FRM and CMT]( is a former banker and financial educator and is the editor of the Rude Awakening. Sean has trained interns and graduates from Goldman Sachs, Morgan Stanley, Citi, Bank of America, Standard Chartered Bank, DBS (Singapore), the Abu Dhabi Investment Authority (ADIA), Bank Indonesia (the central bank), HSBC, Barclays, RBS, and BlackRock. He knows the global economy is being corrupted by forces that most people can't understand and has used his unique and worldly experiences to help people navigate the markets. [Paradigm]( ☰ ⊗ [UPDATE PREFERENCES]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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