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Monetary Drug Pushers
Earlier today, the monetary drug pushers at the Federal Reserve gave the addicts on Wall Street exactly the fix that they have been craving. In fact, not only did Powell deliver exactly what the doctor ordered with respect to interest rates, saying the Fed was going to remain “patient”, probably indefinitely, with respect to another rate hike, but Powell also made it clear that the balance sheet wind-down, otherwise known as quantitative tightening, was off of auto-pilot. In fact, based on what Powell said, I would be surprised to see any significant reductions in the Fed’s balance sheet from here. Not surprising, the market rallied as a result of getting what they wanted out of the Fed. At one point, I think, the Dow was up better than 500 points, but it did close up 434 points – back above 25,000 – 25,014.86, to be precise.
Quantitative Easing and a Return to Zero
But, you know, just like any addict, they can never get enough. I think that soon the markets are going to be demanding a lot more from the Fed than just a cessation of rate hikes and a commitment not to shrink the balance sheet. I think what the addicts are going to require is going to be more quantitative easing and a return to zero, and that is exactly what the Federal Reserve is going to provide, once it realizes that that’s what’s necessary. Of course, I don’t think that is going to work; I think that is going to deliver the overdose that I have been warning about since the Fed first went down this mistaken policy road. I knew that we would ultimately end up exactly where we’re headed. It’s just that the markets still haven’t figured this out.
Markets Need to Focus on the Why
The markets really need to be focusing on the Why. Not just looking at what the Fed is doing, but why the Fed is doing it, and what it actually means about the underlying health of the U.S economy or the efficacy of prior Fed policy. Now if you listened to the press conference, or even just read the prepared remarks, the Federal Reserve wants to pretend that everything is still great – that the U.S. economy is still in great shape. In fact, the Fed wants to pretend the U.S. economy is just a good as it was when it hiked rates during the September meeting, let alone the
December meeting.
Continued Rate Hikes and Auto Pilot QT
Going back to September, when the Fed was saying that they were going to do maybe 3 or 4 rate hikes in 2019, and that the balance sheet unwind was on auto-pilot, that the Fed was going to set that aside and sell off about $50 billion worth of treasuries and mortgages every month, just forget about it, not even worry about it and that the Fed was going to simply focus on interest rates. Even if something bad happened in the economy they were going to let the quantitative tightening program continue on auto-pilot. The only changes that they were prepared to make was with respect to interest rates. So, at that point, the Fed was very optimistic on the economy and they had a policy of continued rate hikes and auto-pilot QT.
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