In the last two days the probability of a cut in the Federal Funds rate to .25% has increased to over 50%, becoming the most likely scenario for the upcoming Fed Open Market meeting in December. Factors include:
- Employers slashed 533,000 jobs in November, pushing the jobless rate to its highest level in 15 years. The 3 month job loss is the worst since the 1940s.
- Manufacturing in November contracted by the sharpest amount in over 15 years.
- The latest Federal Reserve Biege Book reported that the economy worsened in all 12 of the nation's Federal Reserve districts.
- The ISM reported that service industries in the U.S. contracted the most in at least 11 years.
- The Mortgage Bankers Association reported that a record 6.99% of loans outstanding in the third quarter were behind in their payments.
I could keep going but you get the point. It's pretty bad out there and the Fed is scrambling to right the ship. The markets now believe the economy is bad enough that the Fed will cut to .25%, periliously close to absolute 0. At that point there is no lower to go, and like its physics counterpart, all sorts of strange things will start to happen to markets.
The Fed is also pulling out a bag of tricks borrowed from Japan to institute what it called Quantitative Easing. As I wrote in the latest interest rate analysis, our economy is increasingly looking like Japan's in the 1990s. There, a bursting real estate bubble rocked the banking system and forced the Japanese Central Bank to cut rates to 0%. The government also embarked on massive public works projects to stimulate the economy. The result was what's called the Lost Decade, a decade of virtually no growth. In many ways, Japan still hasn't recoved. Its markets are still down from their highs in the early 1990s (the Nikkei peaked at 38,916 in 1990 and is now at 13,376). Think about it, the main Japanese stock market is down over 60% nearly 20 years later. Growth, even when it returned in Japan was moderate, and real estate remains below its pre-bubble highs,
The similarities to Japan are chilling, starting with central bank rates that are going to 0%.
Rates on savings accounts, money markets, and certificate of deposit are coming down in anticipation of more rate cuts.
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