The Fed is about to cut rates. But why? Markets are at record highs, which should mean the economy is running smoothly. That’s hardly a reason to ease policy. We need to look at what’s really happening and call things by their real names.
The Fed has effectively abandoned its inflation target because it no longer believes it can reach it. And why does it have to start cutting rates if, officially, everything is fine? Because it isn’t. The US needs to refinance its massive debt, banks are sitting on hundreds of billions in unrealized losses, consumers are stretched, and the labor market is collapsing.
Source: FDIC. Unrealized gains/losses on US banks’ investment securities. Losses driven by higher rates compared to the near-zero levels of past years.
The FDIC chart shows huge unrealized losses at US banks, both in held-to-maturity and available-for-sale portfolios. This is the cost of “higher” interest rates, relative to the near-zero levels of just a few years ago.
The labor market tells a similar story. Recent revisions revealed that the US didn’t actually add jobs — it lost them. The adjustment cut 911,000 jobs from previous estimates. Consumers are under pressure too, something we hear directly from friends living in the US. This is why rates are being cut — not because inflation is under control, but because recession risk is real. The danger is clear: cutting rates in an environment where inflation isn’t tamed could send the US into stagflation. And it looks like policymakers are willing to take that risk.
Honestly, it’s hard to believe decision-makers are unaware of this. They must know recession is inevitable. But they seem to be playing for time, trying to make sure the US falls last. That explains the trade disputes and tariff games that appear senseless and benefit no one. Look at UK bond yields. Look at France, edging toward a Greece-style scenario. They know what’s coming. They just want it to start somewhere else first.
One of the most reliable recession indicators is unemployment rising 0.9 percentage points from a cycle low. Data shows unemployment has already crossed that threshold. Since 1945, this moment has almost always been followed by recession within months.
Source: Creative Planning / Charlie Bilello. Historical data since 1945 shows recessions typically follow soon after unemployment rises 0.9% from a cycle low.
An even clearer picture comes from nonfarm payrolls excluding health care and social assistance. These sectors are defensive and often mask real weakness in cyclical parts of the economy. Once stripped out, job creation is essentially flat, a level that has reliably preceded recessions in the past.
Source: Bloomberg. Payrolls excluding health and social assistance show almost no net job creation, a typical pre-recession signal.
The slowdown is also reflected in how major investors position themselves. Berkshire Hathaway is holding more than $347 billion in cash and Treasury bills, the highest level in history relative to its total assets.
Source: Glenview Trust, Bloomberg, Company filings. Buffett’s cash pile at a record $347+ billion.
Buffett doesn’t try to time every market move. But when his cash buffer rises this high, it signals a lack of attractive opportunities and an expectation of better entry points ahead.
The second half of September has historically been one of the weakest stretches of the year. Over the past 51 years, average returns were negative and down weeks outnumbered up weeks. Combined with current labor market weakness, this seasonal pattern adds to the headwinds.
Source: Wayne Whaley. Historical S&P 500 performance in the second half of September, last 51 years.
Technical indicators add another layer. RSI on daily, weekly, and monthly charts all show bearish divergences. This rare combination has often marked major market tops. It means fewer stocks are driving the rally and momentum is weakening across timeframes.
Disclaimer
This article is for informational purposes only and does not constitute investment advice. Investments in financial markets carry risks and it is important to conduct your own analysis before making any investment decisions.