Here's What the Fed's Really Up to with This Rate Cut

It's no surprise to me that stocks aren't doing much of anything right now.

Sure, there's Wall Street's annual "Sell in May and go away... to Nantucket or the Vineyard" summer slowdown in action, but even with a Fed rate cut two days away and earnings season in full swing, it's quiet out there.

It's because the market has already priced in the rate cut. Investors are giving it a 100% chance, as in "foregone conclusion."

There are still some talking heads out there going on and on about "a half-point cut, to stimulate a slowing domestic and global economy," but that's just wrong, and it's filling a lot of heads with the wrong idea.

These analysts know the price of everything and the value of nothing. Me, I've had the Fed clocked for years... Greenspan... Bernanke... Yellen... and now Powell. I can see 'em all coming a mile away; I always could. They're central bankers after all.

Let me fill you in on what's really happening... and why it's happening.

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The Big Secret: The Fed Doesn't Want Markets Much Higher

First things first: We're going to see a quarter-point cut, not a half point, as some people have been saying this month.

I know that because the Fed has essentially been sending up smoke signals telling us as much.

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The central bankers on the Federal Open Market Committee (FOMC) don't want to lose face and be accused of inflating a bubble (heaven forbid!) and losing control of events.

Were they to slash the rate by a half point, stocks would get bid up to stratospheric levels, to even crazier multiples. In any case, stocks would certainly go much higher than the Fed expects them to be at this juncture.

Then the Fed would be accused of using its magical rate-manipulating powers to engineer a rally that's divorced from earnings realities. It would be exposed to charges of kowtowing to politicians - one politician in particular...

So instead, it's watched stocks digest this July rate cut while this earnings season pans out.

It will give us a quarter-point cut on Wednesday, and then break out the pom-poms to cheerlead. It will cheerlead with vague talk of a possible September rate cut if the economy isn't growing above 2% and stocks are drifting lower on less robust earnings.

That's the Fed's plan. Mark my words.

The Federal Reserve Has No Choice but Easing

It's the plan because the Fed is watching other global central banks' easing. It wants to follow up with its own easing, to keep up with the Joneses... and the Draghis, the Kurodas, the Yis, the Carneys...

Remember, we're in a trade war. As other countries' currencies are manipulated lower, their exports become cheaper, and the United States buys more foreign goods and services.

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If the Fed doesn't keep up with the worldwide money-cheapening party, the dollar will strengthen on our relatively higher rates. That's not what the president wants right now.

That means factories aren't being built here, production is still elsewhere, and jobs are being lost to overseas competitors like China. That really isn't what the president wants right now, either.

The bottom line is, the Fed says it's insuring against trade war worries and to prevent a global growth slowdown from taking hold here. But what it's doing is managing the dollar in relative terms and supporting markets without overinflating them.

Unless, that is, something comes out of left field and wakes up investors. The way it looks from here, it'd be wise to take a "wait and see" stance with any trading you've got planned. If you see any otherwise decent stocks take a hit and you just can't pass up the bargain, by all means, swing away - I'll do the same.

But for the broader markets, the volatility that can make for really big, worthwhile profits just isn't in the cards right now. It'll come back, though, and when it does, you'll hear from me.

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About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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