“Davidson” submits:

The Fed’s rate cut anticipation…don’t hold your breath on this or invest as if it has meaning. The headlines repeat the same endless mantra when the data does not support this thinking. The talk today is demanding a rate cut but the data of Fed Funds Rates vs the Discounted 3mo Treasury Bill, DTB3 on the Dallas Fed FRED site, shows a clear pattern that goes back to the 1960s.

Shown is the weekly detail from Feb 2016. Note that the weekly DTB3 rises and falls roughly smoothly but the Fed Funds steps up or down in increments of 0.25 or 0.50%(1/4 or 1/2 of a percentage). Also note, which should be easily observed, that the Fed adjustments follow the DTB3 by several weeks both rising and falling. That is, the Fed follows it does not lead rate adjustments. Currently with the DTB3 at 4.27% and Fed Funds at 4.33% the Fed. The Fed has shown, recently, it prefers a 0.20% rate premium to the DTB3. Today’s differential, 0.06%, does not have enough leeway to let the Fed cut rates to 4.18% range and maintain its premium. We would need to see DTB3 drop to ~4% for this to occur.

Current DTB3 does not suggest any adjustment in Fed Funds Rate is likely. Beyond this observation, economic activity has operated well at much higher rates in the past and is currently operating well. There is nothing that a 0.25% rate adjustment will do to change our current steady growth low inflationary climate.. The argument that a rate cut is required to stimulate the economy is not supported.

Where did inflation go and the expected rise in rates? The best I can see this in the data is it went to advanced economies, the Eurozone, and excess M2 was absorbed by a period of US$ strength and countries holding onto the US$ they accumulated as M2V(Money Velocity) never became excessive. In other words, receivers of US$ preferred to hold than spend them for goods and the Eurozone saw over 10% inflation when the US inflated thus absorbing our bad spending habits. Inflation is a monetary issue of over-spending/over-issuance, but market psychology and international capital flows play a significant role. This time the rise in M2 did not produce the expected inflation to the extent witnessed in similar past periods.

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