Darius recently sat down with our friend Felix Jauvin from Blockworks, where they discussed the Fed, the bond market, a positive inflection in the fiscal impulse, and more.

If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio: 

1. Is The Fed Cutting Rates to Ease or Normalize?

When the Fed cuts rates, it is important to distinguish between policy normalization and easing. Outright easing refers to the Fed lowering the policy rate below neutral to stimulate the real economy. 

Normalization, however, aims to bring the policy rate to a neutral level without additional stimulus. We believe the Fed is cutting rates to normalize policy rather than stimulate the economy. 

Taking a step back, the Fed is lowering the policy rate during a business cycle expansion, with growth already likely to exceed expectations according to our GRID Model projections. Altogether, this creates a generally supportive environment for asset markets.

2. Is the Bond Market Pricing In A Recession? 

When examining the neutral policy rate in U.S. dollar money markets, we find that they are only pricing in about half of a recession.

Historically, on a median basis, during postwar U.S. recessions, the Fed has lowered the policy rate by around 400 basis points. In recessions caused by overly restrictive monetary policy, the Fed has lowered the policy rate by a median of 475 basis points.

With roughly 250 basis points of rate cuts currently priced in, this reflects only 50-55% of a typical recession. We disagree that the bond market is fully pricing in a recession. Instead, we believe the market is pricing in a bimodal distribution: one scenario of a soft landing (which we currently are in the camp of) and the other of a potential recession.

3. How Has The Fiscal Impulse Changed In Recent Months?

At 42 Macro, we track US Treasury Federal Budget Net Receipts, Net Outlays, and the Budget Balance on a fiscal year-to-date, year-over-year percentage change basis. 

When observing the data, we find the fiscal impulse has been modestly negative since early 2024. Through July, the budget deficit was down 6% on a fiscal year-to-date, year-over-year percentage change basis. However, with the data through August, the budget deficit has risen by 24%. This marks a significant inflection from a negative fiscal impulse to a positive one. 

This dynamic will likely contribute to our GRID Model projections for Nominal GDP to surprise to the upside in the US economy over the medium term. That dynamic favors overweighting risk assets like stocks, credit, crypto, and commodities and underweighting defensive assets like bonds and the US dollar.

By now, you’ve likely realized that piecing together an investment strategy from finance podcasts, YouTube videos, and macro “gurus” on 𝕏 is not delivering the results you know you deserve. 

This kind of approach only leads to confusion from conflicting advice, frustration from mediocre returns, and exhaustion from the emotional rollercoaster of your portfolio swings.

If you don’t change your process, how can you expect to get better results?

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