The Day the Fed Changed Directions

By: Curtis Wayne 0 Comments   3/20/2019

The Fed today said the US economy is doing fine and at the same time they are worried about it.  The Fed says lots of things, but it’s what they do that should make you worry.

Today the Fed changed policy directions, from raising rates and lowering its holdings of Treasury bonds (QT), to stop raising rates and stopping lowering TBond holdings in a few months.

This is a major move, one that should be heard around the world.  The Fed is obviously getting very worried about the economic activity in the US and around the world.

Patients

Fed Chairman Jerome Powell said in a press conference following the end of a two-day policy meeting. “‘Patient’ means that we see no need to rush to judgment.”

Wait a minute, they have been holding interest rates near zero for a decade and in the last few years only raised them to 2.25% the lowest in modern history. 

How much more patient could they get?  This decision today will go down in history as the day the Fed changed directions and began turning back towards QE.  The stock market is still at record highs, what are they going to do if the market roles over? 

I think it is pretty obvious, they are going to go back to zero interest rates and trillions in new money.  But this time the world will not be able to sustain the dollar, by printing currency to match the new dollars because the world is already swimming in inflation and debts from the 2008 crisis.

2.1 percent GDP

Fed policymakers project gross domestic product to slow to 2.1 percent this year.  That is pretty weak compared to 3.1 percent last year and this is just their projection at this time.  It could easily drop much more in the coming months. 

Consumer debts are at record highs with mortgages, auto-loans, student loans and credit cards.  If consumers are tapped out at this low rate of employment, and businesses begin to layoff, consumers will not be able to pay their bills and the assets bubbles will pop. 

Business debts are also at record highs and low inflation has driven razor thin profit margins. Just a little bit of inflation and companies will no longer be profitable.  The retail industry is already is full meltdown as their profits are gone.

Inflation at 1.8 percent

The Fed policymakers project inflation at 1.8 percent for the year. But what about oil prices that are climbing fast. Oil could easily go up 50% this year, which would have a massive increase in prices of all goods. 

The Fed is going to be in a very difficult place this time around.  Raising interest rates clearly causes the fragile economy to slow down, which could pop the massive asset bubble that are now the foundation of the economy.  

If the Fed keeps rates low, the new money they have already added has inflated massive asset bubbles, which has trapped consumers and businesses with high debts and therefore growth is stopping.  But growth cannot stop, because the only way to pay for the high debts is if growth continues. 


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