The Fed’s easing efforts can be described as “too little, too late”?
“Perhaps they think that they will exercise power for the general good, but that is what all those with power have believed. Power is evil in itself, regardless of who exercises it.” – Ludwig von Mises, Nation, State, and Economy
After the Federal Reserve’s monetary policy U-turn earlier this year and the central bank’s decision to cut interest rates for the first time in a decade, mainstream investors and analysts believe that holding rates lower and for longer will help keep stock markets afloat and the economic expansion alive. However, given the actual state of the economy, the fundamentals of most leading US companies, the unprecedented debt burden and spiking geopolitical risks, it is clear that these hopes are more akin to wishful thinking and that the Fed’s easing efforts can rather be described as “too little, too late”.
A political surrender
For months, President Trump has been very vocal in his criticism of the Fed, arguing that it raised rates “too early and too much” and holding it responsible for every stock market downswing. As the pressure mounted, as the 2020 election campaigning geared up and as US markets jittered, Fed President Powell was eventually convinced to take a radically more dovish position, bringing the bank’s “Quantitative Tightening” program to an early halt and proceeding with the long-anticipated rate cut. Many had hoped that this move would suffice to bring the easing-addicted stock markets back to a bullish course and keep them there, however, it achieved nothing of the sort. In fact, not only did Wall Street not celebrate the historic cut, but it actually showed clear signs of disappointment, as investors were hoping for a steeper reduction than the 0.25% the Fed delivered at the end of July. So did President Trump for that matter, who once again expressed his opposition to the Fed’s “careful” approach without any reservations, tweeting “Powell let us down”. And that was only the first of a series of tweets that seriously upset the markets.
Since the beginning of August, we have seen escalations in the trade war with China and a number of Twitter-delivered tariff threats and other hostile statements by the US President. As a result, market volatility has skyrocketed and uncertainty has spread even beyond the US. These concerns over the trade frictions are, of course, only the tip of the iceberg, as there are much more serious and structural risks underlying the US economy, as well as the European one and the Chinese. Nevertheless, they did serve to increase the market’s expectations of another rate cut in September. These expectations were solidified in mid-August, as the yield curve inverted for the first time since June 2007, meaning that interest rates paid by short-term bonds jumped higher than those paid by long-term bonds. The inverted yield curve has preceded the past seven periods of negative US growth and is thus widely seen as a strong recession indicator. Consequently, the event sent markets into a tailspin, the Dow posted its biggest one-day drop since October and the Fed is now once again called upon to act as a stabilizing force.
Policy turning point
Expectations for the US rate environment now point to a return to ZIRP, while predictions of the Fed entering into negative territory, like the ECB, BoJ and SNB, seem less and less unrealistic. In fact, in a recent interview, St. Louis Fed President James Bullard himself said that negative interest rates “certainly could be looked at”, as a possible strategy.
However, when seen from a “bigger picture” standpoint, the current pressure on the Fed to cut rates as much as possible and as soon as possible is part of a much wider pattern. Most major central banks have either already implemented or are preparing to enforce rate cuts and other accommodations, while calls for increased government spending are also getting much louder. As the 2020 election draws closer and Democratic candidates are intensifying their efforts to stand out from their competitors to secure the nomination, a clear pattern begins to emerge from their campaign promises and debate exchanges. Much higher spending levels, increased taxation on the “rich” and aggressive government intervention in many sectors of the economy are among the core talking points of the front runners.
The party’s hard turn to the Left might have split Democratic voters, something many analysts see as a potential advantage for the incumbent President, it has however also vastly shifted the economic debate. Policies that were once unthinkable and largely laughable, especially in the US, like the Universal Basic Income, Universal Healthcare or a new “Wealth Tax”, are now part of the mainstream conversation. The same goes for economic ideas like those outlined by the Modern Monetary Theory, promoting deficit spending and reckless money printing as sound and sustainable ways of supporting the economy. The idea of the government as a provider and as an equalizer between rich and poor is gaining traction, while popular support for such “free lunch” campaign promises is only bound to grow, especially as the economy slows down.
A policy reversal is also evident on the other side of the aisle, as the GOP, once famous for its calls to cut the debt and to balance the budget, has demonstrated the exact opposite trend under President Trump. Deficit spending, increased subsidies to tariff-hit sectors and loud calls to the Fed for further monetary easing, are strong indicators of the future economic policy direction of the administration, should Donald Trump be victorious in the next election. Therefore, it can be argued that whoever wins, inflationary policies and solid accommodations are in the cards, both on the monetary and fiscal front.
Outlook for precious metals
While gold has already resumed its role as a safe haven and a portfolio stabilizer during the past few weeks of market turbulence, this recent uptick in price is very likely only the beginning of a longer-term bull market for the precious metal. Given the monetary and fiscal policy environment in the US and around the world, and what can be seen as the beginning of a fiat currency devaluation era, physical gold and silver investors are uniquely positioned to reap the benefits of a solid upside that lies ahead, while protecting their assets from the upcoming turmoil in the markets and widespread economic uncertainty.
While stumbling blocks may be present going forward and price pullbacks in gold and silver could prove challenging for speculators, the long-term investor is clearly in a position of great advantage. After all, as I have repeatedly highlighted, it is precisely in times like these that physical precious metals investments really shine and serve to protect and preserve value, especially when stored in a safe and predictable jurisdiction, like Switzerland.
Claudio Grass, Hünenberg See, Switzerland