Looming Slowdown Is The Fed’s Fault

The Challenger, Gray, & Christmas report on corporate layoffs just posted at 153,000, the worst October since 2003.  Economists are floating numerous explanations for this, including the government shutdown, tariffs, and other "usual suspects".  But I am going to put the blame right at the feet of the Federal Reserve, for having kept interest rates too high since 2023.

My definition for "too high" is the 2-year T-Note yield, shown in this week's chart.  I first wrote about that here in 2009, and have been writing about it for longer than that in our twice monthly McClellan Market Report newsletter.  The 2-year yield knows better than the 400 PhD economists working at the Fed what the FOMC ought to do with its target rate.  The FOMC makes big mistakes when they think that they know better than the silly old bond market. 

For the past 3 decades that the FOMC has been using the Fed Funds target rate as its monetary policy instrument, the FOMC has almost always been being the message of the 2-year.  They are either too slow to hike rates in good times, or too slow to cut them.  The 2-year always seems to know.  By maintaining either a positive or negative spread between the 2-year and the FF target, the Fed fuels bubbles and recessions.  If I had my way, the FOMC should just outsource the task of setting the FF target to the 2-year, and that way they could save a bunch of money flying in all of the district presidents and other members of the FOMC for the 8 meetings they hold per year.  And we would get better results.

As a side note, before the early 1990s the Fed used to target the Discount Rate for their monetary policy, something which almost no one ever even thinks about these days.  So extending this comparison back further than what this chart shows would not be a valid comparison given that policy change.

The FOMC is finally getting around to cutting rates now, but their rate of cutting has been too slow and they have been maintaining this negative spread we still see today.  Think of that negative spread as having the Fed's foot on the economy's brake pedal.  We are now seeing the results of all this built-up braking force over the past 2 years.  Other agencies and causes may get blamed in the media for the economic slowdown, but it is the Fed's fault.