Joseph Wang: Fed Interest Rate Cuts Could Hurt The Stock Market

Episode Summary

Executive Summary: Jack Farley launches Monetary Matters on the day the Fed cuts rates 50 bps, and Joseph Wang argues the move is dovish and reflects rising labor-market concern, not a full recession call. They debate whether the market and Fed differ on the path ahead, how a weaker dollar and higher deficits could pressure stocks, and why political uncertainty, balance-sheet runoff, and geopolitics may keep markets volatile.

Main Topics: Fed’s 50 bps rate cut and dovish pivot (Priority: 5/5): The discussion centers on the surprise-sized rate cut, the dot plot, and Powell’s press conference. Wang says the Fed is starting the easing cycle with a larger-than-usual move because it is increasingly focused on labor-market weakness and wants to get ahead of recession risk. Labor market deterioration and recession risk (Priority: 5/5): Wang and Farley discuss rising unemployment, downward revisions to job creation, and surveys indicating weakening hiring. The Fed’s higher unemployment projections are interpreted as evidence that policymakers expect more labor-market softening ahead. Fed communication, consensus, and dissent (Priority: 4/5): They examine why the meeting was not fully predictable despite the Fed’s preference for forward guidance. Wang attributes the uncertainty to real disagreement inside the FOMC, highlighted by Governor Bowman’s dissent, rather than a change in communication strategy. Markets vs. Fed on the easing path (Priority: 4/5): The Fed’s dot plot implies fewer cuts and a higher terminal rate than the market expects. Wang argues markets remain more dovish than the Fed, though longer-dated yields rose after the decision, signaling concern that the Fed may ease too aggressively. Why big cuts may hurt stocks (Priority: 5/5): Wang explains his bearish-to-cautious equity stance: aggressive cuts could weaken the dollar, hurt foreign investors through FX losses, and coincide with elevated fiscal deficits and recession risk. He argues this may reverse the powerful U.S. equity rally. Politics, policy uncertainty, and accountability (Priority: 4/5): A major theme is that public policy—monetary, fiscal, immigration, and tax—drives markets more than valuation alone. Wang says the election could produce sharply different policy regimes and that central banks are political institutions with weak accountability. Fed balance sheet policy and reserves (Priority: 3/5): They review quantitative tightening, reverse repo usage, and the ‘lowest comfortable level of reserves.’ Wang says QT can continue for now because reserves appear ample, and the more likely stop would come from economic slowdown rather than reserve scarcity.

Key Arguments: The 50 bps cut is dovish, not hawkish, because it comes with a materially lower projected policy path and higher unemployment forecasts. The Fed is acting to protect against a weakening labor market and possible recession; inflation is less of the immediate problem than it was. The market has become more dovish than the Fed, but current growth data still does not justify the market’s full pricing of cuts. A higher neutral rate than pre-pandemic means policy may not need to fall as deeply as markets expect. Large rate cuts can hurt equities by weakening the dollar, especially because foreign investors hold a large share of U.S. stocks and often do not hedge FX exposure. Massive fiscal deficits and lower rates could combine to pressure the dollar and trigger foreign selling of U.S. assets. Policy uncertainty around the election is a key reason to be cautious on stocks, more than valuation metrics. The Fed is politically influenced not necessarily through direct manipulation, but through personnel selection and how it weighs inflation versus unemployment. QT is likely to continue for now because reserves still look abundant and repo conditions are not signaling stress. The reverse repo facility should keep declining toward zero as money market funds shift into T-bills, but the real QT stop may come from an economic downturn.

Data Points: Fed rate cut: 50 basis points - The FOMC cut rates on September 18 and launched the easing cycle with a larger-than-expected move. Market pricing before meeting: About 25 bps cut expected; later near 40-55 bps priced - Wang describes the market as initially expecting a smaller cut, then repricing toward 50 bps after press reports. Unemployment rate: 4.2%-4.3% - Current labor-market data discussed as evidence of cooling conditions. June unemployment projection: 4.0% - The Fed’s June dot plot forecast for year-end unemployment. New unemployment projection: 4.4% - The updated SEP projects a higher unemployment rate, signaling labor-market concern. GDP growth revision: 2.8% to 3.0% - Wang cites an upward revision in GDP as evidence the economy is still growing above trend. Fed funds market outlook for end-2025: Around 2.8%-2.9% - Market pricing is more dovish than the Fed’s dot plot for late 2025. Fed dot plot end-2025 outlook: 3.4% - The Fed’s projected policy rate for December 2025. June 2025 dot plot outlook: 4.1% - The Fed’s prior projection, showing a notable downward revision. Foreign ownership of U.S. equities: About 20% - Wang uses this to argue that FX effects matter more for U.S. stocks than many investors assume. Fiscal deficit projection: About 6% of GDP - Wang says the IMF projects a structurally large U.S. fiscal deficit for years. Peer developed-country deficit: About 2% of GDP - Used as a comparison showing the U.S. deficit is much larger than peers. Yen strength over three months: 10% - Wang cites the yen move as an example of how foreign investors in U.S. assets can be hurt by FX swings. Reverse repo facility peak: About $2.5 trillion - The RRP peak in 2022, illustrating prior excess liquidity. Current reverse repo level: About $300 billion - The RRP has fallen sharply and then flattened, indicating reduced excess cash. Governor Bowman dissent: First Board of Governors dissent since 2005 - Used to emphasize that there was real disagreement within the FOMC. Inflation comparison: Above 2% - Inflation was above target for a prolonged period but has eased significantly. Australia inflation: Around 4% - Cited as an example of immigration-driven shelter inflation pressures abroad. Canada population growth: About 3% per year - Used to illustrate how rapid population growth can push shelter inflation higher.

Pivotal Quotes: "The Federal Reserve is concerned about the labor market." — Joseph Wang: Wang summarizes the rationale behind the larger rate cut and higher unemployment projection. "I’m bearish, and bearish slash very cautious." — Joseph Wang: His current stance on equities amid policy uncertainty, FX risk, and recession concerns. "Starting with a bang." — Joseph Wang: His description of the Fed’s decision to begin the cutting cycle with a 50 bps move.

Implications: Listeners should expect a more volatile easing cycle: the Fed is worried about jobs, markets want even more cuts, and stocks may be vulnerable if the dollar weakens. Policy uncertainty, not just rates, may dominate the next several months.