The Federal Open Market Committee held its last meeting and released its last statement for 2019.  The Federal Reserve will keep its target the same (for now) for the federal funds rate.

The federal funds target rate is still between 1.5% and 1.75%.  The rate paid on required and excess reserves will remain at 1.55%. So the banks are still getting some free money for keeping their reserves parked at the Fed.

In the FOMC Implementation Note, it states the following:

“In light of recent and expected increases in the Federal Reserve’s non-reserve liabilities, the Committee directs the Desk to continue purchasing Treasury bills at least into the second quarter of 2020 to maintain over time ample reserve balances at or above the level that prevailed in early September 2019.”

The phrase “at or above the level” could mean $10 trillion for all we know.  It is mostly non-specific.  This is really probably the bigger story than the federal funds rate that the financial media focuses on.  The Fed’s balance sheet is the more important thing.

Jerome Powell says not to call it quantitative easing (QE).  I guess we can just go back to calling it monetary inflation.

The adjusted monetary base has gone up over the last couple of months, but not in a major way.  A hundred billion dollars or so would be enormous to anyone else, even Jeff Bezos, but for the Fed’s balance sheet, it is a rather small percentage.  It is more than a rounding error, but it is not that big of a change when you compare it to the last 11 years.  It would have been a big change if you compare it to early 2008.

After the announcement, stocks rallied a little bit.  This is in spite of the fact that the Fed is not anticipating any rate hikes in 2020.  Of course, everybody knows that the Fed will intervene quickly if anything goes wrong.

Meanwhile, the Fed continues to pump money into the repo market to prevent short-term rates from spiking.  When you read a story that the Fed pumps in $70 billion or $100 billion in a day, this is not an increase in the balance sheet every day.  It is a significant story that the Fed is essentially forced to support this market, but we should not be fooled that this is equating to monetary inflation, or at least not yet.

Perhaps some investors were a bit relieved that the Fed is holding for now.  If the Fed kept cutting rates, it would mean that they see major problems ahead with the economy.  They probably do see that, but they are doing their best not to encourage panic in the market.

The Fed is seemingly in a sweet spot right now.  They have gotten away with a lot over the last 11 years without noticeable consequences.  Middle class America is struggling, and it is largely because of the Fed’s inflation that has misallocated resources and allowed the government to run up spending.  But most Americans don’t blame the Fed. If prices across the board rise significantly, then more people will look at the Fed.

This sweet spot isn’t going to last forever.  There will be a recession.  It doesn’t seem like it will happen now because this game has gone on for so long.  At some point, the spotlight will be back on the Fed.  Unfortunately, when things go bad, they will probably go full force towards zero (or negative) interest rates and more massive monetary inflation.