Fed’s Loading Its Bazooka for 2024!

Rate Cuts and QE Coming: Fed’s Loading Its Bazooka for 2024!

It’s a cycle that never ends. Inflation rears its ugly head, then the Federal Reserve beats it into submission with quantitative tightening (QT) and interest rate hikes. Next, inflation subsides with or without the Fed’s help, after which the central bankers can declare “Mission accomplished.”

What comes after that? The Fed clearly can’t just leave interest rates high and allow all of the bonds on its balance sheet to mature. American mega-banks, which are “too big to fail,” depend on the Federal Reserve’s bond purchases so they can get that massive liquidity injection.

The return to quantitative easing (QE) is only part of the equation, though. Federal Reserve Chairman Jerome Powell isn’t just going to let government bond yields stay elevated. High interest rates hurt the American consumer because they have to pay more for mortgages, credit cards, and auto loans… but that’s not what Powell really cares about.

He’s interested in the big picture and maintaining the status quo, not looking after any individual or family’s well-being. The big picture won’t look pretty if the government can’t even pay the interest on its own debt (not to mention paying the principal on the debt).

Believe it or not, the government pays nearly $1 trillion per year just on the interest of America’s debt. This is due to the principal debt growing, but another contributing factor is high interest rates.

Two ways to reduce these interest payments would be for the government to reduce the debt load (don’t count on that happening anytime soon) and to lower the interest rate. In other words, Powell and the Federal Reserve will have to cut interest rates in 2024 whether they want to or not.

Plus, that’s not the only scenario in which the Fed will have to lower interest rates next year. If something breaks in the economy – bank failures, unemployment zooms higher, the stock market collapses, etc. – you can count on Powell to ride in on a white horse and save the day with QE and interest rate cuts.

Always remember that Powell isn’t Paul Volcker, and this isn’t 1981. The political climate in 2023 and 2024 will not allow Jerome Powell to tear off the Band-Aid and push bond yields to 15% to quickly defeat inflation. Instead, it’s been a gradual tightening of financial conditions that will culminate in a euphoric return to ultra-accommodative monetary policy.

The market is already pricing in this inevitable outcome. 2023’s stock market rally isn’t only about the “Magnificent Seven” technology stocks and the frenzy over generative A.I. It’s also about a forward-looking market that knows this isn’t Paul Volcker’s Fed and today’s central bankers are politicians to the core.

Granted, Powell has stated that he wants the inflation rate to reach his 2% target – but  listening to Jerome “inflation is transitory” Powell hasn’t benefited investors or the American public. It really shouldn’t be surprising if Powell decides he’ll be “flexible” on his 2% inflation target and starts cutting interest rates in a few months irrespective of the current inflation rate.

It probably won’t be long before the Fed starts to pivot from rate pauses to rate cuts since we’re already down to 3.1% headline inflation in November. This mainly reflects lower oil prices, which Powell isn’t responsible for, but the Fed will take credit for the “progress” nonetheless.

The headline numbers don’t reflect the reality of how many Americans are forced to live now. According to a recent New York Fed survey, households continue to say that they’re much worse off than they were a year ago.

At the same time, Powell has to keep the markets guessing with vague, tough-sounding language every time he speaks. Sounding too dovish would quickly spur economic activity and the flow of money, which could push inflation back up.

Don’t get the wrong idea, though. Once Powell flips the switch from pausing to cutting interest rates and once he opens up the QE liquidity tap again, the impact will be sudden and pervasive. Bond yields will collapse, the dollar will crater, and the stocks that haven’t already gone to the moon will fly into space.

Small-cap stocks that have underperformed mega-caps in 2023 due to fears of tight lending conditions will roar back in 2024. Among the biggest winners will be small-cap stocks associated with precious metals, which are only being held down because the dollar happens to be high at the moment.

That’s a temporary situation, and the dollar’s good year is about to come to an end. Gold can only be held back at $2,000 for so long, and silver at $23 is the greatest holiday gift any investor could ask for.

Gold actually had a pretty good year, but 2024 will bring so much more. Powell doesn’t care about raising the gold price, but he’ll end up doing it out of necessity. So, if you’ve got precious metals and their value suddenly surges, you can write the central bankers a “thank you” card even if they don’t deserve it.