The Fed was on a tear in 2018, raising rates four times at four quarterly FOMC meetings (out of eight total) by 0.25% each time. These rate hikes came on top of “quantitative tightening,” or QT, where the Fed burned money to reduce the M0 money supply by about $500 billion, equivalent to another 1.00% in rate hikes.
This was all done in the name of “normalization” of rates and the Fed’s balance sheet in an effort to undo the QE and ZIRP science experiments of Ben Bernanke and Janet Yellen.
There was only one problem. By trying to normalize, the Fed almost threw the U.S. economy into a recession.
This was one cause of the precipitous stock market decline from Oct. 1–Dec. 24, 2018. Fortunately, Jay Powell woke up out of his trance just in time (maybe) and slammed the brakes on tightening. He announced the Fed would “pause” its rate hikes and be “patient” about future rate hikes. He also announced the Fed would taper its QT and bring the tempo of balance sheet reduction to zero by September 2019.
The pause and patience talk is Fed-speak for “We’re not raising rates for the indefinite future and we’ll let you know in advance when we change our minds.” (The Fed will do this by dropping the word “patient” from their FOMC press releases when the time comes. That’s the signal that rate hikes are back on the table. Watch for it).
Unfortunately, the balance sheet reductions will continue for four more months, so the U.S. economy is not out of the woods yet. This article covers this ground about no planned rate hikes and continued patience. But it reveals something else.
The Fed officials’ debate shows they really have no idea where the economy is going and, as a result, have no idea what the future path of interest rates really is. They’re wandering in the dark. That’s what happens when you manipulate markets for 10 years. There’s no way to escape the room.
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