Only three short months ago, the Federal Reserve projected its quantitative tightening (QT) rodeo to continue unabated, with reductions in its $4 trillion dollar QE’ased balance sheet, the deployment of maturing bonds back into Treasuries, and at least a few more interest rate hikes in 2019. At the conclusion of yesterday’s FOMC TaperCaper meeting, the prospect of normalizing monetary policy devolved into “japanification” possibilities with zero interest rate policy (ZIRP) and negative interest rate policy (NIRP) heaven around the next bend, as all of the QT ammunition was impatiently nuked into oblivion at one presser.
*FED TO TAPER BALANCE-SHEET ROLLOFF, SEES IT HALTING END-SEPT
*FED SIGNALS NO RATE HIKE THIS YEAR WITH ONE INCREASE IN 2020
The Fed has transitioned from an outlook with rates in a hawkish mode to rates remaining dovish until at least 2021. Pedro da Costa opined last week on the feeling of infinity, engendered by the Fed’s January about-face.
The Fed’s Pause Has An Eerie Feeling Of Permanence… “It’s as if the goalposts had rapidly shifted: Until late last year, it appeared only substantially softer growth would prompt the Fed to stop raising rates; now, it seems a notable acceleration is required to trigger additional hikes. Ironically, the economic slowdown may itself be due in large part to the Fed’s own premature monetary tightening. The central bank appears to have misread the low official jobless rate as a sign that full employment was at hand and inflation pressures lurked just around the corner, repeating a mistake it has made several times since the Great Recession. Instead of waiting for wage growth to pick up substantially before tightening monetary conditions, the Fed chose to act preemptively. Sadly, that means the recent spike in median wage gains, which rose 3.4% in the year February and was the strongest in this recovery, might be more of a lagging indicator than a sign of the long-sought but still-elusive recovery in American workers’ purchasing power and standard of living.” – Forbes, Mar. 11
I covered the Fed’s first hint of a 180-degree policy reversal with “How it Sounds When Fed Doves Cry” published on Jan. 31, and I penned the following thought in “Born a Trader or Teach a Trader – USD Technical Analysis” published on Mar. 18.
“The Fed has made it clear since January that it will patiently pause interest rate hikes, as the Fed Funds futures have priced in a 28% chance of a rate cut by the end of 2019. That will emphasize a focus by traders on the details of this week’s FOMC policy decision on the QT of its balance sheet going forward. If the Fed clearly signals a slowing or halt in the reduction of its balance sheet, that would raise questions about the underlying health of the U.S. economy.”
Are you entertained yet?
“Common sense risk management suggests patiently awaiting greater clarity.” – Jay Powell, Jan. 30
If you missed Powell’s Fedspeak on the same day that springtime sprung, here is the videotape. Popcorn is not included, so go and pop your own.
“Growth is slowing somewhat more than expected… We see a situation where the European economy has slowed substantially… and China’s economy has also weakened.” – Jay Powell, Mar. 20
The Fed intends to keep interest rates on pause or lower as long as possible, keep the stock market on an upward trajectory, and keep consumer and investor confidence high. None of that would be necessary if the U.S. economy was treading upon a solid footing. According to the mainstream punditry, the U.S. economy is stable, inflation is roped in, GDP is strong, jobs are sprouting faster than they can be filled, wages are rising, and banks are not at risk.
I dare point out that confidence in the Fed is likely contracting faster than the Fed tapered. What Powell failed to elaborate upon in Wednesday’s policy statement is that Europe is falling into recession as the ECB resurrects QE from the dead, Asia’s economic hiccup is intensifying with trade war tariffs complicating matters, the U.K.’s Brexit debacle remains unresolved and carries substantial financial risks, and global sovereign debt issues are slowly boiling us frogs. It is clear that the Fed does not want the general public and passive investor to focus on how bad things actually are.
Fed seems jumpy about its patient approach – James Grant and Judy Shelton on CNBC, Mar. 20
If we put ourselves in Powell’s shoes, he may be indefinitely pushing the pause button to blunt global contagion with a happy face, rather than focusing on negativity that could launch a self-fulfilling prophecy. Honesty from policy hacks would cause the markets to crash, consumers to stuff their mattresses with worthless paper, and a loss of confidence in central banking to maintain stability. Unfortunately, the Fed cannot risk its credibility, but ironically, it is doing so despite its best efforts to avoid inevitability.
“When it becomes serious, you have to lie” – Jean Claude Juncker, President of the European Commission
There is one option that clears away any misdirection hypnotic Fedspeak may have upon you, and that is to do as they do, not as they say. Central banks are hoarding gold at a record pace, cash is king, and risk management is not just for banking nerds.
Central Banks Are on the Biggest Gold-Buying Spree in a Half Century – Bloomberg, Jan. 31
Buy Gold, Sell Stocks Is the ‘Trade of Century’ Says One Hedge Fund – Bloomberg, Mar. 19
Almost 40 years after Paul Volcker brought the U.S. economy to its knees to bring inflation down, Jay Powell and his colleagues are on a mission to stoke price pressures and avoid a Japan-like deflationary trap.
Former Fed Chairman Volcker Blasts McKinsey and Billionaires… “There’s an argument now: What if it doesn’t matter and we can just pile debt on (MMT)? Someday confidence is lost. The longer the imbalance lasts, the more difficult it is to correct. This is part of what we’re paying for now. We were willing to run these current account deficits, and it was favorable for businesses—they could invest abroad, import more freely. But eventually it breaks down. During that process, you lost a lot of small American manufacturing. Now we’re getting the blowback from that. A lot of people feel left out, and they were! We took great pride in open markets, free competition, no tariffs. That pleases the scholars, it pleases big business, but it doesn’t please the people in the part of the country that lost out.” – Barron’s, Dec. 2018
Exposing the Myth of MMT… “I’m an opponent of Modern Monetary Theory (MMT) — but for different reasons. As far as I know, I am the only analyst who has raised the objections I list below. Today, I’m going to show you what I believe to be the real problem with MMT. Again, it is easy to see why so many politicians on the Democratic side would be such big supporters of MMT. Free college tuition, student loan forgiveness, Medicare for all, free childcare, universal basic income (UBI) and a Green New Deal. Some support them all. Needless to say, that’s going to cost a lot of money.” – Jim Rickards at the Daily Reckoning, Mar. 2019
RICHARD KOO: I Cannot Find Anyone At The Fed To Refute My Argument That America Is In A ‘QE Trap’… “The QE “trap” happens when the central bank has purchased long-term government bonds as part of quantitative easing. Initially, long-term interest rates fall much more than they would in a country without such a policy, which means the subsequent economic recovery comes sooner. However, as the economy picks up, long-term rates rise sharply as local bond market participants fear the central bank will have to mop up all the excess reserves by unloading its holdings of long-term bonds. Demand then falls in interest rate sensitive sectors such as automobiles and housing, causing the economy to slow and forcing the central bank to relax its policy stance. The economy heads towards recovery again, but as market participants refocus on the possibility of the central bank absorbing excess reserves, long-term rates surge in a repetitive cycle I have dubbed the QE trap.” – Business Insider, Oct. 2013
Just over two years ago, Lacy Hunt put it all into perspective with easy to understand language at the Strategic Investment Conference.
Lacy Hunt: The Fed’s Monetary Policy Is Destabilizing
In Apr. 2018, Lacy appeared on Bloomberg with a brief follow-up.
‘Significant’ Monetary Deceleration Underway, Hoisington’s Hunt Says
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