We are already approaching the end of July… it seems just yesterday that Fed chair Powell spoke at the last FOMC press conference not cutting rates but alluding to them in the near future.
I have spoken about how central banks are doing this to devalue their currencies. The ECB just affirmed more stimulus and cutting rates deeper into the negative. The Dollar gained. Now the Fed wants to cut rates to also ensure the dollar does not gain. Why? Read my work here on WHY I think the Dollar will continue to rise, even when the Fed wants it to weaken. Remember, as the Dollar gets stronger, then and only then, does all the problems in the world exacerbate. Dollar denominated debts become a problem in emerging markets, and as their currencies weaken against the Dollar ( a la Turkey and India), those nations will feel more pressure to drop the Dollar for settling payments…more importantly for Oil. Iranian Oil looks much better because you can use any currency except the US Dollar. The Saudi’ and the Gulf states could also start accepting other currencies (with a promise of Russian military protection) and this way the US Dollar Demand takes a hit.
If this occurs, the Fed could buy up the US treasuries like the ECB and BoJ, however this would lead to a confidence crisis in the Fed, but more importantly in the US Dollar. The US Dollar would lose its reserve status. With Dollar Demand getting a hit, the artificial demand being the reserve currency is not there, and we would see excess dollars creating insane amounts of inflation.
The Federal Reserve (alongside other central banks) are stuck. This Keynesian/ soft money experiment has failed. They cannot admit it though. They need to maintain the confidence in the system. Japan is the best case scenario. Japan has essentially been in deflation and stagflation for nearly 30 years. The Fed would be the BUYER of last resort.
Unfortunately this crisis is coming. It cannot be avoided. Even Ray Dalio has mentioned this, last year saying we are in the 7th inning (the 9th being the crisis), and his article on a paradigm shift, and why one should increase their allocation of Gold has been the talk on the street.
Here at UnchartedFX, I have spoken about how rates would be cut before Fall of 2019. Expect much more rate cuts…even down to zero.
Here are some reasons why the Fed WILL cut rates on the 31st…If they do not, expect the markets to DIVE. Markets are up and at all time new highs because they are pricing in rate cuts. In fact, it seems now, at the time of writing on a Friday afternoon, the market may be pricing a 50 basis rate cut, or Powell mentioning MORE rate cuts to come. If Powell does not deliver, we will see markets fall, hence why he may need to deliver a 50 basis point cut to keep the market happy.
Without further ado, here are reasons why the Fed WILL cut.
1) The bond market. The short end of the yield curve has to be brought down in an attempt to normalize the yield curve, and the Fed Funds rate yields more than the ten year! Meaning banks take a negative carry.
2) Real economy is not actually improving, and we are either already in a recession (remember it is a lagging indicator… PMI came out negative this week, and US GDP came in at 2.1%-beating expectations however Q1 GDP was 3.1%), or
we are heading towards a recession. The Fed wants to act quickly.
3) To help service US government debt as well as the consumers. So much bad debt out there, and the consumer needs to borrow more to live. This is very important. Everyone got used to cheap money. A financial drug.
4) The Fed has to relieve the pressure mostly from emerging markets. EM dollar denominated debt gets more expensive as the dollar gets stronger,
which leads to more problems, and also plays a factor for those nations to buy oil from Iran bypassing the US Dollar . Essentially a way to ensure Dollar Demand remains.
5) Also Jerome Powell and the Fed have talked themselves into a corner. Stock markets only care about cheap money. This is why they are up. When
rates go down, the stock market will be the only place to go for yield. The Fed now needs to deliver…a 25 basis point cut may not be enough as mentioned above.
This is difficult to many academia economists to grasp. Why cut rates when the market is at all time new highs? Jobs data looks decent? Inflation seems to be getting met?
The Fed is now making its decisions based on the market. The new mandate for central banks is to keep assets propped up! Even if this means reverting back to QE. We are entering a period where central banks will become the strongest and most powerful institutions in human history…surpassing the catholic church from Medieval times.
These central banks will run the world, turning into the BUYER of last resort.
Again, hopefully some new type of Bretton-Woods deal will happen, but many people will get hurt before this happens. Gold seems to be coming back. Human history is cycles of hard money and soft money. We know it works. Central banks are buying Gold in record amounts. Pay attention to this.
Gold is a CONFIDENCE CRISIS hedger/asset. People run into Gold when they begin to lose confidence in government, central banks and the fiat money. We are approaching this type of environment.