Rate cut trio

Posted By Darren Winters on Nov 1, 2019


Rate cut trio

The Fed’s rate cut trio, made on October 30, was widely anticipated by Fed watchers. The Fed’s rate-setting committee, known as the FOMC committee voted 7-3 to cut the Fed fund rates a third time this year by another 25 bps to 1.5%.

What is becoming clear is that even policy makers don’t see eye to eye with the direction of monetary policy going forward. 

Put simply, the Fed’s rate cut trio was not unanimous, three committee members voted against the latest rate cut

But is this dissent among the FOMC committee healthy, normal or should this be interpreted as an early warning sign that there may be trouble ahead?

Fed Chair Powell at the helm is hearing not one, not two, but three voices on deck advising him to change his  bearing and avoid implementing a Fed rate cut trio.

What is haunting the rate-setting committee over the Fed’s rate cut trio?

Rate cut trio

From history, we know that the creation of currency out of thin air has consequences. Moreover, when the central bank loses control and floods the system with unlimited fiat currency that leads to hyperinflation.

The everything bubble is the hyperinflation of asset prices created by the debasement of fiat currency. If you measure real estate and stocks, bonds against precious metals the price of those assets in some cases have fallen.

So the bull market in asset prices is an illusion created by the debasement of the central bank’s fiat currency.

What might then be haunting the rate-setting committee over the Fed’s rate cut trio is that it could trigger hyperinflation in the wider economy

Could the greatest experiment in the history of finance, a decade of unprecedented monetary easing finally end just as history predicted, a Weimar Republic style hyperinflation?

But surely, those fretting about the Fed’s rate cut trio have overlooked the fact the US dollar is king, the world’s reserve currency

The US dollar today could lose 10% of its value on the foreign exchange and it would still be pricey against the major other currencies. Perhaps that is why Fed chair Powell embarked on a Fed rate cut trio.

A Fed’s rate cut trio is likely to depreciate the US dollar, which is likely to be upbeat for commodities, stocks and provide US exporters with a well-needed tailwind. Moreover, a depreciated US dollar could give a boost to the already stuttering global economy by reducing the cost of servicing US dollar denominated loans.

The Fed’s rate cut trio, to depreciate the US dollar could be the final joker in their pack

But playing the joker card too has risks. The dollar depreciation is likely to trigger inflation above the Fed’s mandate target of 2%. If a depreciated dollar doesn’t provide the domestic and global economy with enough lift and inflation picks up, then what?

Hiking rates in a highly leveraged slowing economy would trigger a meltdown, similar to last December, but equally doing nothing could lead to hyperinflation. In this worst-case scenario, the Fed would be trapped.

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