So, the reaction to Fed Chair Powell’s statement yesterday seems to be mostly positive. The S&P 500 busted higher yesterday and is making a valiant effort to extend the good times today…
Yes, the Fed indicated that at least a couple rate 25 basis point cuts are likely this year, which would take the headline interest rate down to 4%.
That forecast is a little concerning because the Fed also acknowledged that GDP is slowing and lowered its growth forecast for the full year. Plus, it raised its forecast for inflation.
To top it all off, Powell said that this potential move higher for inflation would be “transitory”…
Oh boy…
The last time Powell used the T-word, it was an unmitigated disaster. And Americans are still dealing with the painful consequences of Powell thinking that he knew better and ignored the simple Fed mandate to act when inflation jumps over 2%.
I’m actually a little surprised that there weren’t any audible gasps from the press conference crowd when he let fly the T-word
There are a couple reasons that we haven’t yet seen any PTSD flashbacks – yet.
One – Powell acknowledged recent soft economic data and the uncertain outlook due to tariffs. And he said the economy was still in pretty good shape, that there’s no reason to freak out about tariffs before they happen, and the Fed stands ready to act with the aforementioned rate cuts if the economy weakens further…
Now, I remember the Greenspan Fed very well. Parsing the gobbledygook that flowed effortlessly from that man’s mouth was a competitive sport. It was as if the more arcane the language, the more confidence Greenspan inspired – as if the man must know what he’s talking about cuz nobody else could figure it out.
Not so much with Powell. His message is pretty clear – the Fed has shifted its focus from inflation to growth. The so-called “Fed put” is back in play – if growth weakens (especially in the labor market) the Fed will cut rates. The market likes that.
Second – and far more important – the Fed is pre-emptively stimulating the economy starting now…
QE Is (Almost) Back
Quantitative easing (QE) is a Fed program where it actively buys mostly short-term Treasury bonds to push interest rates down and also to fund the Treasury and deficit spending. It is a form of stimulus.
During COVID, the Fed increased its balance sheet to nearly $9 trillion dollars to help keep the US economy afloat. And yes, that cash increased money supply and helped spark inflation.
QE can be perpetual if the Fed buys new bonds with the money it receives when bonds on its balance sheet mature. This keeps the money supply stable, or increases it.
The Fed started Quantitative Tightening (QT) in 2022. QT reduces the money supply because the Fed does not buy new bonds when current ones mature. It lets them “run off” the balance sheet, which lowers the money supply. QT is restrictive in much the same way as hiking interest rates.
Since 2022, the Fed’s balance sheet has shrunk from nearly $9 trillion to $3.45 trillion.
Last June, the Fed slowed the pace of its monthly QT balance sheet reduction from $60 billion to $25. Yesterday, it dropped the amount to a negligible $5 billion.
Combine that with the promise for rate cuts, and it’s pretty clear the Fed is now in stimulus mode. That’s typically good for stocks…especially in “uncertain” times…
At least that’s one way of looking at it…
Who’s Buying Bonds?
Another way to look at this is to ask the question: who’s buying US Treasuries and funding the government’s 6% deficit right now?
Put another way — which countries out there are happy to lend money to the US?
Canada? China? The EU?
Foreign countries typically own 25%-30% of US debt. The US has been picking fights with allies that lend the US money when they buy our treasuries…
Perhaps you’ve noticed that gold prices have been rolling higher as reports that central banks are buying gold at a record pace.
Could it be that America’s lenders don’t want to lend anymore? Could it be that the Fed is well aware of this and is stepping in to fund deficit spending?
It’s not easy to know exactly what central banks are doing behind the scenes. But we can certainly put the puzzle pieces together and see what it shows…
One of the most important pieces of that puzzle right now is gold…and it’s likely to keep moving higher…
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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