The Federal Reserve (Fed) cuts Fed funds by 25bps to 1.75%-2.00% rates as expected, but signals that it does not expect any more rate cuts in 2019. The Fed has never been more divided and voted 7 to 3 for the cut. Esther L. George and Eric S. Rosengren voted to keep rates unchanged and Bullard voted for a 50bps cut. Not a single FOMC member expected more than 1 rate cut any time in the future.
The Fed statement reiterates that it will “act as appropriate to sustain the expansion,” and the statement contains minimal changes from the previous statement. The Fed economic forecasts were largely unchanged from the prior meeting in June. There was a slight upgrade in GDP growth expectations, but still, see the expansion slowing and nowhere near Trump’s 3% goal.
However, the Fed has to somehow explain why they are cutting rates in the face of surging inflation and some of the lowest unemployment rates – the Fed mandate of full employment and price stability. Core inflation (see inset chart) is around 2.4%, edging higher over the 2.0% target it has set for itself.
Then came the shocker during the Fed Q&A. Powell said that the Fed may have to resume the organic growth of its balance sheet sooner than expected to help ease money markets. Since October 2017, the Fed has been allowing Treasurys and mortgage-backed securities holdings to roll off each month – from $4.4 trillion to about $3.8 trillion Fed balance sheet reductions.
For those who don’t know what QE stands for, it is called quantitative easing (QE), which is where the central bank injects new money into the economy by buying U.S. Treasury bonds (and potentially other assets). The Fed previously went through three phases of bond buying in 2013 and 2014, so if the Fed restarts this process it would just be the latest phase, QE4. The U.S. is not alone, the European Central Bank is already in it’s QE process. Japan as well.
News Forecasters asks, will QE4 start and what does this do to the shape of the economy? Well effectively QE4 has already started, we are just not sure how much. The likelihood is that it will start slow and grow steadily. Especially prior to the 2020 presidential election, then it may have to accelerate if the economy stalls. Trump was unhappy after the Fed announced its modest rate cut, he said, “No guts, no vision!” All politicians like to “goose up” the economy before an election.
Concerning the shape of the economy. We won’t go through endless data here, but everyone knows that wealth inequality is at a historical high and growing – the 1% controls nearly 50% of the world’s wealth. The best way to describe the shape of the economy is the concept of medieval serfdom. This is where the King owns everything and the serfs work for the King via some debt slavery scheme.
So how would you grow an economy like this? The short answer is – you can’t, though a few minor exceptions may occur. The reality is:
- The serfs don’t earn enough to accumulate enough savings to start new businesses.
- Markets are dominated by the King to make it difficult to enter the monopolized market.
- The King also makes laws to ensure their market advantage.
- Any innovation is either blocked or bought out by the King.
- The King must inject just enough money into the system to keep people alive and give them the ability to pay their ever-increasing debt.
- GDP can grow until all the population succumbs to the medieval serfdom.
Under a fiat currency scheme and medieval serfdom, it requires an ever-increasing injection of money. This is why QE4, even QE infinity is all but assured with ever-decreasing interest rates. And what is the end game for the King? You have two options; a) stop the merry-go-round and restructure the economic system – taking down the King in an immediate revolution, or b) continue the medieval serfdom system as long as possible – ending in hyperinflation (see here) and currency debasement, taking down the King.
Ask yourself, if you are the King, which option would you choose? It is clear, option b. Stay the King as long as possible. Timing is always difficult to predict (often getting it wrong), but News Forecasters believes though option b is what will happen, the timing looks to be still 10 years away – sooner or later is the question.
A video presentation of this subject: