The Federal Reserve’s upcoming decision on interest rates has everyone on edge. The big question on the table is whether the Fed is about to make a major blunder. Some economists certainly think so.

To kick off, recall that non-farm payrolls, a key measure of job creation in America, were revised down. In August, the Labor Department said that from April 2023 to March 2024, the United States actually created 818,000 fewer jobs than originally thought. 

This is a big red flag that the economy might not be as strong as everyone assumed.

Now, the problem is that rate changes don’t work overnight. They take time to ripple through the economy. If the economy is weaker than the headline data suggests, the Fed might need to cut rates by 150 to 200 basis points.

That kind of easing doesn’t kick in immediately, according to economists. Apparently, it takes six to eight months. The Fed is focusing too much on the short term. There’s clearly a huge lag between policy decisions and their effects. 

If the economy shows more signs of weakness in early 2025, any cuts the Fed makes now won’t fully hit until late 2025. That’s a long time to wait when things are already destabilized. 

We know that Jerome Powell has decided to cut rates next month. What we don’t know for sure is how big he’ll go. However, the weird thing is the announcement didn’t have the lasting effect we all hoped for in the market. Bitcoin is down 10% since then.

Arthur Hayes, one of crypto’s earliest believers, has his theories on why. “I thought rate cuts were good for risk assets,” Arthur says.

But he does offer a reason: Reverse Repurchase Agreements (RRP) are currently paying 5.3%, and no Treasury bill under one-year maturity is offering more than that. 

“Money market funds will move cash from T-bills to RRP, which is negative for liquidity,” Arthur explains. Since Jackson Hole’s speech, RRP has gone up by $120 billion, and he believes this trend will continue as long as T-bill rates stay below RRP.

Meanwhile, inflation data isn’t exactly pushing the Fed to slam on the brakes. Last Friday, the U.S. saw the personal consumption expenditures (PCE) price index, the Fed’s go-to measure for inflation, inch up by 0.2% for the month. 

That was pretty much in line with what everyone expected. Rate futures are reflecting this cautious sentiment, showing a reduced chance of a 50 basis-point cut later in September.