A few weeks ago a client asked me if I thought the Fed would cut rates. I said that I thought yes, but I questioned what the consequences would be.
So it seems inevitable that we get a cut of 25 beeps in the Fed Funds rate, but the market seems less certain about what will happen with the now relevant discount rate.
I can't figure how the market can take any Fed outcome positively.
With a 25 basis point cut, the Fed might be perceived as being behind the curve. With a 50 basis point cut, they raise the question of just how bad it is. Of course, as I say 'no positive reaction seems possible' the market could race higher with a resolution to one of the big questions looming out there.
More important than trying to guess the immediate reaction might be to look a little further down the road at what might be coming. Despite some well reasoned (or not) commentary to the contrary, I don't think the dollar can rally off of an easing cycle, but I will concede that anything is possible in the first day or two.
All that has happened thus far is about some sort of problem in the US that reveals a weakness of some sort. From a common sense stand point, the stronger dollar case does not stand up for me.
Owning foreign anything for the last few years has created a nice tailwind which I think is likely to persist.
The longer term theme, even if how long is unclear, is that Fed cutting will eventually lead to a normal yield curve, which will change how a lot of bond portfolios are deployed - at least the ones I manage.
