It was just over a month ago when the Fed decided not to raise rates any further this year and only raise rates ones in 2020. That was not long after Fed chair Jerome Powell indicated that the Fed was on a path of normalisation and this path was supposedly on “autopilot”. The economy seemed to strengthen, and more rate hikes were on their way.
Money Printing
After the announcement that the Fed would pause rate hikes and stop QT, the Fed is now openly talking about QE again. Quantitative Easing, of course, was used to prop up the markets in the years following the economic crisis that started in 2008. Printing tens of trillions of dollars and euro’s inflated bubbles in for example the housing market and stock market. To service the huge loans and deficits, interest rates were cut to zero and in some European countries are still negative. The emerging markets are also suffering. With 63 trillion, the emerging market debt bubble is now three times larger than in 2007 and seven times larger than in 2002 when it was 9 trillion dollars.
Slowing Economy
Lorie Logan, head of market operations monitoring and analysis or MOMA at the New York Fed, said during a speech in New York on April the 17th: “The size of these purchases will need to be larger than similar pre-crisis operations”. Indicating that the number of liabilities already shown on its balance would make smaller purchases ineffective.
And although Logan said that the discussion of the Fed, adopting Standing Repo Facility or the conversion of treasuries into reserves by banks, is “really in its early stages”, having this discussion at all, should let everybody know that the longest economic expansion in US history is possibly about to end. But with markets worldwide slowing down and housing, auto sales down and jobless claims up, the signs have been there for a while and we shouldn’t be surprised.
The FEDs actions speak louder than words
The one thing that has changed abruptly though, is the stance of the Fed and its policies. This, once again shows that, just like in ’08, the Fed is wrong when its officials tell us that everything is fine. Forecasting recessions or even economic slowdowns somehow isn’t something the Fed does or seem to can and its policies are reactive instead of pro-active.
Precious Metals
There is a good chance that the early stage talks could eventually result in a new round of QE. And when this happens protecting value by acquiring physical precious metals could be a winning strategy.