While many in the financial markets often take what the Federal Reserve says as gospel, given everything that’s occurred over the past decade, it’s worth considering a few unanswered questions that the central bank has yet to explain.
Perhaps the most important of which is that if we are now a decade after the last financial crisis, and the economy is really as strong as the president and Federal Reserve continue to assert, exactly when will it be time to finally undo the unprecedented monetary easing?
If all of the stimulus actually worked, then wouldn’t it be reasonable to assume that by this point, what was long ago sold as temporary could finally be undone?
Yet here we are in 2019, and both the interest rate level and quantitative easing balance remain far from anything that could be considered “normal.”
Federal Reserve officials decided in late January to pause their steady campaign to raise interest rates as the global economic outlook became less certain and financial markets failed to appreciate the Fed’s willingness to shift if the economy weakened, according to the minutes of that meeting released on Wednesday.
Fed officials concluded that a pause posed “few risks” for a strong economy in which prices continued to increase at a subdued rate, the minutes show. The Fed did not see any immediate threats to America’s economic expansion, but officials indicated they were worried enough about potential risks — including slowing growth in China and Europe, trade tensions, a volatile stock market and a prolonged government shutdown — to postpone rate increases.
So which is it? Is the economy strong? Or are there significant risks facing the markets? Talk about covering both sides of the argument at once!
Additionally, how are prices rising at a subdued rate, when even the extremely generous CPI figures say that last month’s core inflation is already past the Fed’s 2% mandate?
The index for all items less food and energy rose 0.2 percent in January (SA); up 2.2 percent over the year.
In regards to the Fed’s balance sheet, I was stunned last year when I heard chairman Jerome Powell announce that his new definition of “normal” was now $2.5-3 trillion. As opposed to the $800 billion level where the balance sheet stood before QE began. When it was sold as “temporary”.
I also wrote last year that even as divergent as the $2.5-3 trillion estimate was from the original plan introduced in 2009, that it was incredibly unlikely to happen. And sure enough, here we are just a year later, in an economy that the government and Federal Reserve officials simultaneously claim is prosperous and strong, and once again the story has changed.
The Fed has slowly been winnowing that $4 trillion portfolio by allowing up to $50 billion in bonds to mature each month, but officials appeared to agree in January that the balance sheet runoff should end this year.
Officials agreed that “it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year” and said the announcement “would provide more certainty about the process for completing the normalization of the size of the Federal Reserve’s balance sheet.”
Consider me officially perplexed as to how announcing a cessation of balance sheet tightening provides more clarity in regards to the normalization process. Because as an investor, the idea that the Federal Reserve is once again unable to follow through on what it previously promised creates the exact opposite of certainty.
Which is why I continue to suggest that it’s a much more profitable and advisable strategy to pay attention to what the Fed does, rather than what it says. Because it’s not some mystical feat of clairvoyance that allowed me to forecast in advance that the Fed would run into significant issues if it tried to undo the past decade of policy.
But rather just a basic understanding of the Austrian economics ideology that allowed so many gold and silver advocates like Peter Schiff, Rick Rule, and Jim Rogers to see the previous bubble implosions well in advance.
Sometimes it’s incredible to see how so many market participants still take the Fed statements as indisputable fact. Especially given the Fed’s track record of missing all of the bubbles. In many cases even after they began to implode.
Yet for those who would like to be aware of what’s coming before it’s too late to do something about it, I’ll just reiterate what Rogers said to me during an interview when he mentioned how “when people lose confidence in government and money, they always buy gold and silver.”
I still have yet to find any reason why this time will be any different. And if you have any questions as to why, as always you’re welcome to email me here.
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