August 30, 2024
By Steve Blumenthal

Dr. Lacy Hunt argues that the Fed’s current policy stance is too restrictive for the economy’s growth rate. He points out that the average growth of real per capita GDP and GDI is around 1.4%, aligning with the long-term trend since the 1970s. With the Fed nearing its 2% inflation target (excluding questionable assumptions about shelter costs), Lacy suggests a more appropriate policy rate is 3.33%. Instead, the Fed’s current rate is significantly higher at 5.33%, which he believes is far too restrictive, and the Fed is not acknowledging that they are behind the curve.

– Dr. Lacy Hunt, Thoughtful Money with Adam Taggart Interview, August 27, 2024

With August 2024 coming to an end, the current federal funds rate is 5.33%. This is the highest level in over 22 years. Odds makers have a 65% probability of a 0.25% rate cut in September, the first reduction since the Fed began raising rates in March 2022. Jackson Hole is behind us, but all eyes are on September 18, day two of the Fed’s next meeting. A new rate-cutting cycle is about to begin. 

As a quick reminder, the federal funds rate is the interest rate banks in the United States pay each other to borrow or loan money overnight. The Federal Open Market Committee, led by Fed Chairman Jerome Powell, sets the rate. The Fed meets eight times a year to decide whether to keep it the same or change it. Think of the process as a lever the Fed can push to tighten or pull down to stimulate the economy. 

Share the following with your children and grandchildren. It is an excellent animated summary by Ray Dalio about How The Economic Machine Works.

The federal funds rate is an important benchmark that can affect other rates. As Dalio said, “Credit is the most important part of the economy and the least understood. It is the most important because it is the biggest part and the volatile part.” 

In early 2022, the Fed’s federal funds rate was hovering near 0%, and the Fed was still pouring billions into bond purchases each month to keep the economy stimulated. Not only was that free money printed out of thin air, but it also enabled you and me to take advantage of ultra-low borrowing rates. Think about the juice that is provided to the system. The Fed kept its foot on the gas pedal even as U.S. inflation hit levels not seen in 40 years.

But when the Fed finally decided to tackle inflation, it didn’t hold back. In the past 2 1/2 years, the central bank has hiked the fed funds rate by over five percentage points. This aggressive move has started to cool off the runaway inflation that was eroding the purchasing power of everyday Americans.

One of the great economic thinkers of our day is Dr. Lacy Hunt. According to Lacy, a Fed Funds rate of 3.33% is the neutral rate. That is a full 2% below the current level. The Fed has indicated they will begin bringing interest rates down in September. 

CMG’s Brian Schreiner sent me an excellent Dr. Lacy Hunt interview hosted by Adam Taggart. You’ll find the link below. In summary, it is not the nominal fed funds rate that matters; it’s the real (which means after inflation) fed funds rate. He is saying that with inflation coming down, the real Fed funds rate has increased, putting much more pressure on the economy. The Fed is behind the curve. Sadly, the Fed is always behind the curve due to its dependency on lagging data.

From Peter Boockvar’s Boock Report this morning, “As for the Fed, next week’s payroll figure and unemployment rate will be the swing factor between a 25 or 50 bps cut in mid-September. The former, though, will be revised about four more times before we know the final figure, but the latter is what it is and won’t be revised.”

Grab a coffee and find your favorite beach chair. I hope this note finds you with a good book and your loved ones by your side. Remember to relax, not sweat the small stuff, and keep smiling. Hakuna Matata! Magic happens when we are happy. 

On My Radar: 

• Dr Lacy Hunt: Both Presidential Candidates Will Only Make Our Debt Problem Worse
• 10 Facts About the US Treasury Market
• Random Tweets 
• Personal Note: Game On 
• Trade Signals: August 29, 2024 

Source: Adam Taggart, Thoughtful Money

Please see the important disclosures in the disclosures section below.

I “like” and “retweet” posts I find interesting. I enjoy X because I can easily follow people I like to keep On My Radar.

You can follow me on X (formerly Twitter) @SBlumenthalCMG.

You can also listen to my podcasts on Spotify, and find me on LinkedIn.

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Personal Note: Game On

“I’ve missed more than 900 shots in my career. I’ve lost almost 300 games. Twenty-six times, I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”

– Michael Jordan

“I am a member of a team, and I rely on the team, I defer to it and sacrifice for it, because the team, not the individual, is the ultimate champion.”

– Mia Hamm

Steve

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Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Private Wealth Client Website – www.cmgprivatewealth.com
TAMP Advisor Client Webiste – www.cmgwealth.com

Forbes Book – On My Radar, Navigating Stock Market Cycles.  Stephen Blumenthal gives investors a game plan and the advice they need to develop a risk-minded and opportunity-based investment approach. It is about how to grow and defend your wealth. You can learn more here.

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Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.

Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.

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Written Disclosure Statement. CMG is an SEC-registered investment adviser located in Malvern, Pennsylvania. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy, or exclusively determines any internal strategy employed by CMG. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at www.cmgwealth.com/disclosures. CMG is committed to protecting your personal information. Click here to review CMG’s privacy policies.Please take note of the following text:

 

“The blue line in the lower section shows how much the orange line is above or below the long-term trend line. It is currently in the “Overvalued” zone. Lastly, the data boxes at the bottom of the chart display the annualized gains based on each zone (Overvalued, Fairly Valued – blue line in the middle zone, or Undervalued).”Please take note of the following text:

 

“The blue line in the lower section shows how much the orange line is above or below the long-term trend line. It is currently in the “Overvalued” zone. Lastly, the data boxes at the bottom of the chart display the annualized gains based on each zone (Overvalued, Fairly Valued – blue line in the middle zone, or Undervalued).”