Undisputed beneficiary of rate cuts

Powell says "enough" and there are some interesting questions about what happens next, but I can think of at least one camp that's very, very happy

• rates go down, and then what? Good times roll or labor markets get even tighter again?

• One thing is for sure: Uncle Sam can breath a bit easier

• The Fed’s unrealized losses are happy too

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The undisputed beneficiary of rate cuts

The good Chairman Powell signaled that rate cuts are finally on the way.

Why? Presumably because inflation has settled somewhere in the 2-3% range, and that’s good enough for now, given the “back to normal” labor market, which includes rising unemployment, and slow growth.

So rates go down, and then?

It’s unclear what exactly will happen when rates do start to come down, and there’s a decent argument that it won’t be as good for equities as people seem to assume (at least not without some other tradeoffs).

Likewise, while unemployment might be rising, it’s not because people are getting fired:

Apollo

Firings are still incredibly low.

It’s a weird kind of unemployment that is mostly driven by people trying to break into the workforce—which still matters—but bigger picture, labor force participation is still incredibly high. The labor supply is still secularly tight (because we’re aging).

So, if rate cuts did “heat up” the labor market again, who exactly would firms hire to do the work? What juice is left to squeeze? And what would happen to wage growth (which has been driving inflation for the better part of three years) if the bidding war for workers started again?

Wage growth is still above the prepandemic trend, which will make it awfully hard to bring inflation all the way back down to 2%.

Atlanta Fed

At just under 5%, wage growth is still a full percentage point higher than it was before.¹

With ever increasing demand for healthcare workers especially, 2-3% inflation seems like the new normal.

But anyways, none of this is really the point. And the truth is that it’s awfully hard to predict such a ridiculously complicated chain of events that would provide much, if any, certainty to the question “what happens when rates are cut?”

“What happens?” who can say? What I can say, however, is that there is one very clear beneficiary from rate cuts. The biggest beneficiary of them all, even.

So, who is the one undisputed biggest beneficiary of rate cuts? No, it’s not the Finance Bros, although they’re probably feeling a little relieved.

The biggest beneficiary of rate cuts is Uncle Sam (and, in some ways, the Fed itself).

Let the charts do the talking: