The Fed's tightening campaign, which was supposed to restore a semblance of monetary normalcy, after a decade of extraordinary stimulus, is officially over. The curtain came down far earlier than just about anyone in the mainstream had predicted. Given that the Fed's sounded the retreat before any real blood was shed, should put into question whether they will ever be able to stand tough again.
According to most analysts, the economy is still strong and the financial markets are healthy. Yet despite this, yesterday the Fed announced no rate hikes for 2019 (and perhaps just one in 2020) and a premature September ending of its $50 billion per month balance sheet reduction program. When announced just last year, that program was supposed to cut the Fed's $4.5 trillion bond portfolio by at least half. Instead we will be lucky to get below $4 trillion. Barely a dent.
Their rapid reversal should cause many to wonder if the economy is far weaker than the common wisdom suggests. But that would require investors to look past the gift of a dovish Fed. That's not going to happen in today's market hysteria.
The first real evidence that Fed tightening was making an impact on financial markets and the economy came in December of last year, when rising interest rates led to a downward repricing of stocks, setting off alarm bells on Wall Street. Since then, the Fed has rolled back prior commitments to raise rates and pare down their balance sheet. Yesterday's statement brings that process to a close. The Fed is done. I believe It's next move will be to stimulate not to tighten.
The new normal is that monetary policy will never be neutral or tight again. We are in the age of permanent stimulus. But investors still don't seem to understand the ramifications. If they did, gold would be soaring and the dollar would be tanking. Perhaps surprise easing from the Fed, which may not be far off, will finally get the markets attention.
But once investors finally figure out the new normal, a currency crises far worse than the 2008 financial crisis could bring that to a quick end. So it won't be normal for long.
The commentary below is from Peter Schiff, Chief Economist and Global Strategist of Euro Pacific Capital and author of the The Real Crash: America's Coming Bankruptcy. Please feel free to excerpt what you like with proper attribution. To speak with Peter, please contact Andrew Schiff at 203-662-9700 ex. 135 or email@example.com.
Euro Pacific Capital, Inc.
10 Corbin Drive, Suite B
Darien, Ct. 06840
Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. As a result of his accurate forecasts on the U.S. stock market, commodities, gold and the dollar, he is becoming increasingly more renowned. He has been quoted in many of the nation's leading newspapers, including The Wall Street Journal, Barron's, Investor's Business Daily, The Financial Times, The New York Times, The Los Angeles Times, The Washington Post, The Chicago Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle, The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer, and the Christian Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg. In addition, his views are frequently quoted locally in the Orange County Register.
Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkley in 1987. A financial professional for seventeen years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, he is a highly recommended broker by many of the nation's financial newsletters and advisory services.
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