The Federal Open Market Committee met this week and released its latest statement on monetary policy. The Fed maintained its federal funds target range between 5.25% and 5.50%.
It is expected that the Fed will start cutting its target rate in June and have a total of 3 cuts in 2024. This is in spite of price inflation remaining stubbornly above the Fed’s supposed target of 2%.
It is even more curious that they are expecting more growth than originally anticipated, yet they are still planning on rate cuts. It’s not that we should believe the establishment narrative that the Fed needs to “cool” the economy when it gets “overheated”. But the Fed’s own narrative now seems to contradict its other narratives. If GDP is going to be higher than expected, and price inflation is still stubbornly high, then why is the Fed talking about rate cuts in the near future?
The only explanation I can see is that the Fed is terrified of a massive recession. Some will probably speculate that they are doing it because it is an election year, but I really don’t think that is it. That doesn’t explain why the Fed somewhat aggressively raised rates last year.
They really are looking for a Goldilocks scenario where price inflation isn’t too high but the economy is still roaring.
Financial Assets Explode
It is even more curious on the Fed’s rate cutting anticipation as the stock market hits all-time highs. The S&P 500 has hit new highs several times recently, and it did so again after the Fed announcement. The Dow is about to hit 40,000 for the first time. Bitcoin has exploded to new all-time highs before having a bit of a pullback. Even gold, where there has been no mania, is hitting new all-time nominal highs. It has now breached the $2,200 per ounce mark.
So, let’s assess what’s going on here.
We are in a massive Everything Bubble where major assets are hitting new all-time highs. Price inflation is still stuck above the 2% mark. Meanwhile, the Fed is saying that it plans to lower its target rate several times this year.
It’s almost as if they want the biggest asset implosion in history. “Hey, we’ve loaded this building with dynamite and gasoline and it hasn’t blown yet. We should just pile up some more dynamite. I’m sure it will be fine.”
Rate Cuts With Monetary Deflation?
There is one contradictory thing about the Fed’s policy itself, aside from what was mentioned above. The Fed is talking about rate cuts in the future, which will return us somewhere close to real zero interest rates (adjusted for inflation). But the Fed is still deflating.
The Implementation Note that goes with the statement still says that the Fed will reduce its holdings of $95 billion per month. That’s $60 billion of Treasury securities and $35 billion of mortgage-backed securities.
Why is the Fed deflating its balance sheet while simultaneously implying a coming rate cut? Now that the Fed pays interest on bank reserves, apparently it has no problem implementing this seemingly contradictory policy.
It’s hard to say how long this bubble will keep going, but apparently the Fed wants it to last a bit longer. Maybe they anticipate a Trump victory and want the whole thing to come crashing down on his watch.
When the markets are roaring like this, it draws people in. They don’t want to miss out. It seems like it will just keep going higher. Almost everyone is ignoring the inverted yield curve because it has been inverted for over a year and nothing has happened.
And nothing will happen, until it does.