Why would the Federal Reserve cut rates?

Follow the data.

For some reason the financial markets are relentlessly optimistic this year. Good news are good news and bad news are good news. What the data shows barely even matters. 

Still the data is what tethers the financial markets to the economic reality. It cannot be ignored forever without consequences. So what do we see when we focus on the data instead of focusing on the narrative?

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Why would the Federal Reserve cut rates?

The takeaway

Bitcoin is up. The stock market is up. Even gold is up. That's what you call momentum. By all means, follow the trend and profit from that. 

But beware that the market pulling forward the expectation of rate cuts doesn't mean we are at the start of another 10-year bull market.

The inflation problem is not solved. The key problem is that people are making too much money. Well, normally that's not really a problem, except when you are trying to get inflation back at the 2% target. 

In that case you need wage growth to ease down to normal historical levels.

That's not what we are seeing right now. Not yet. People still make enough money to continue spending. At least as of October.

Because the real test starts now. If November, December and January show a clear slowdown in spending you'll know that the US economy is in trouble.

But spoiler alert, that's not a good thing for risk assets. 

Bringing rate cuts forward