Fed’s great pivot
The latest Federal Open Market Committee (FOMC) meeting, June 19, could have been interpreted as the Fed’s great pivot to a new era of monetary easing from what was a brief period of “patient” normalization policy.
Fed officials no longer made reference to being “patient” on rates.
Instead, the tone was more dovish with talk about “uncertainties” around its outlook increasing.
The Fed’s great pivot is an admission that the world’s greatest economy is not firing on all cylinders and beginning to stutter
Recessionary fears have come home to roost. So the Fed has ditched normalization policy for the foreseeable future, put simply the Fed’s great pivot is a capitulation on normal liquidity conditions with the aim of protecting its most valuable asset, Fed credibility.
However, the state of play is anything but normal. The benchmark rate is stuck near record lows of 2.25% to 2.5% and the Fed has officially publicly stated that there will be no more rate hikes in 2019. Moreover, the Fed has approximately 4,2 trillion USD of assets on its balance sheet.
Perhaps the Fed’s great pivot could also be interpreted by investors that this is the new normal of monetary policy in a brave new world
Previous Fed fed chair Bernanke famously said don’t expect the Fed to tell investors to head for the hills. But equally the Fed can’t pedal the recovery narrative when there is a raft of fundamental data that doesn’t jibe with reality as it could result in a loss of confidence in the Fed and a monetary crisis.
The Fed’s great pivot could also suggest that the Phillips curve relationship between inflation and unemployment is broken
The Phillips curve argues that unemployment and inflation are inversely related: as levels of unemployment decrease, inflation increases. So if the US unemployment rate fell to 3.6%, lowest since 1969 why is US inflation muted?
Cynics among us will argue that the jobs data is cooked. But could there be some structural change going on in the economy? The Fourth Industrial Revolution is already impacting every industry, the Amazon effect is spreading from retail to other sectors. By 2022, 50% of companies believe that automation will decrease their numbers of full-time staff and by 2030, robots will replace 800 million workers across the world.
The Fed’s great pivot could be a reaction to this brave new world where flesh labor plays a decreasing role in economic activity
But with the reserve army of labor growing, real wages will continue to fall in tandem with consumption.
The Fed’s great pivot of keeping rates on hold could be the beginning of a move towards negative interest rates in a coming deflationary environment
If so that would have implications for the 10-year treasury note and precious metals.