A Recession? How Many Rate Cuts?

What Polymarket says about the economy through the end of 2024.

This week’s issue of the Oracle is written by Geiger Capital .

The US is at a pivotal point in the economic cycle, as the Fed prepares to cut rates. Jerome Powell has conducted the fastest hiking cycle in US history and the impact is now beginning to show. So how fast will they cut? Will there be a recession? There are a few great markets on Polymarket that can help tell us what the economy has in store between now and the end of the year. Let’s dive in…

First, let’s look at some key data to get a feel of where we are in the cycle. Yesterday, the Bureau of Labor Statistics reported that the job reports for the last year were revised down by 818,000! Absolutely insane. That means that the job totals added from April 2023 to March 2024 have been overstated by nearly a million. The labor market (and economy) is much weaker than the headline numbers originally indicated.

Also published this week was the Philadelphia services full-time employment index. This tracks full-time employment for the greater Philly area, and other major cities have been reporting similar trends. It fell to -14.9, the lowest level on record outside of Covid.

This makes sense to anyone paying attention - the Unemployment Rate for the entire country now looks ready to explode. Take a look at the chart below. When unemployment begins to rise, it doesn’t do so slowly. It usually spikes violently as the economic cycle turns and gains momentum. (The gray areas are recessions)

Now, with the data clear that the economy is slowing, let’s see what Polymarket is currently telling us about a recession this year.

Polymarket currently lists the odds of a recession this year at just 10%. This makes sense because historically, recessions are not declared until many months or even years after the fact due to huge downward revisions, as we just saw with the jobs data. Polymarket is telling us that a declared recession is not very likely in 2024.

However, if the economy continues to slow and the data gets worse (as I expect it to), the Fed will still have to cut rates. Even if a recession is not officially declared until later, the recessionary environment will force the Fed to cut rates as if we are in one now. Today kicks off the Fed’s meeting at Jackson Hole and it’s being widely reported that Chair Powell is going to green-light their first 25bp rate cut at their September meeting in a few weeks.

Polymarket agrees and has the odds of a 25bp cut in September at 72%.

Where it gets interesting and more unpredictable, is after the first rate cut. If the economic data starts to deteriorate quickly and unemployment continues to climb, the second or third rate cut could be bigger than the first. The Fed has their next meeting in September, but that is quickly followed by meetings in November AND December before year-end. While they will likely start with the 25bp cut as the market shows above, they can attempt to catch up to the data with a 50bp cut in November or December if they find themselves behind the curve.

Polymarket has the odds of 4 cuts this year at 21% and 5 cuts at 14%.

If they were to cut 25bp in September, 25bp in November, and then 50bp in December… that would be a total of 100bp in 2024, or 4 cuts. (25bp each)

Polymarket is giving these options a fair shot at happening and telling us what many have been warning about. If unemployment continues to climb and the economic data continues it’s downward trend, the Fed will quickly find themselves behind the curve and at least one 50bp cut could certainly be on the table in 2024.

If you enjoy economics, markets and unbiased politics… give me a follow on X or subscribe to my Substack.

Disclaimer

Nothing in The Oracle is financial, investment, legal or any other type of professional advice. Anything provided in any newsletter is for informational purposes only and is not meant to be an endorsement of any type of activity or any particular market or product. Terms of Service on polymarket.com prohibit US persons and persons from certain other jurisdictions from using Polymarket to trade, although data and information is viewable globally.