The Fed’s patience signaled by the FOMC’s recent decision to pull the reins of its monetary normalization policy could pivot investors into the dovish camp where they doubt the robustness of the so-called economic recovery.
“Economy is in a good place, outlook is a favorable one and inflation is muted,” said Fed Chair Powell in a March interview with 60 minutes.
Fed’s patience doesn’t tally if the economic outlook is so peachy
If economic outlook is benign, which is what we are being led to believe, why then has the Fed doubled down on its dovish policy?
So here is my fifty cents worth why the Fed’s patience, in other words, an endless period of emergency monetary policy, a cocktail of abnormally low rates of interest mixed in with a bloated Fed balance sheet could be the new tonic normal.
The current bubble economy would implode if the Fed implemented a normal monetary policy
The Fed’s patience stance is like a poker player in a high stakes table bluffing a strong hand when in reality he fears being caught red-handed holding a weak hand.
Look through the Fed’s poker face and perhaps we see an institutional snagged in its own trap, desperate to let air out of the bubble economy (which it created) by moving to policy normalization. But it can’t.
In December, the Fed hiked rates by just a quarter point together with unwinding a small amount of their $4 trillion USD balance sheet and stocks tracked their worse December Since the Great Depression.
But asset bubbles are unsustainable, they eventually burst. So the longer the Fed continues pumping the bubble economy with abnormal monetary easing the bigger the economic calamity will be when the multiple asset bubbles eventual bursts.
The Fed’s patience is based on its fear of turning the great global debt bubble, which is at a historic $184 trillion into a pile of non-performing loans
The global economy is already showing signs of entering a recession and it probably can’t afford the burden of interest rates at normal levels.
So The Fed’s patience could be about delaying the day of reckoning, the bursting of the global debt bubble economy.
The Fed’s patience in policy terms means the abandonment of a normalization policy
The key interest rate will remain unchanged, there will be no more rate hikes, albeit for 2019.
The Fed’s 4$ trillion dollars of balance sheet assets unwind will be completed by September.
BofA now projects that the Fed’s total balance sheet size will end the normalization experiment at $3.76trillion with $1.22 trillion in reserves.
Moreover, the Fed is anticipated to be a net buyer of about $180bn per year of Treasury securities.
So The Fed’s patience is a voyage into the great unknown with already voices from the bond market expressing their concern that the Fed committed is making another policy error.
When a recession bites hard next time around Fed impotence could be exposed. How will the Fed come to the rescue in the next crisis when already Fed fund rates are near historic lows and it has 4 trillion dollars of assets on its balance sheet?