The Fed cut rates by 25 basis points this week citing global uncertainty and for targeting inflation.
Jerome Powell probably wishes he never mentioned the last cut being a “mid cycle adjustment” as it seems now the Fed does not know what they will do next. A pragmatic approach. However, they know they will be cutting rates…it is all about maintaining confidence in the system by selling these cuts as reactions to things not seen by the Fed.
The market is expecting one more rate cut by the end of this year. This is what the October and December futures tell us currently:
However, as the rate cut took centre stage, there was another event which occurred two days before the FOMC rate decision and has much larger ramifications.
The Federal Reserve had to provide, or inject money into the system, to keep Fed Funds rate low, the rate banks borrow money from each other through their reserves at the central bank. Called Repo, or emergency liquidity program.
The amount injected was $300 Billion Dollars in 4 days. Absolutely shocking. You can see the amounts here:
We do not know what the Fed is buying from the banks for this emergency funding (is it treasuries ie: good collateral, or bad toxic stuff like 2008).
A repo event like this precedes a return to QE, and a general financial crisis.
The last time this event occurred was back in 2008…again folks, we are told that this is the STRONGEST economy ever while repo is spiking and interest rates are being cut. If you follow my work, I have been adamant that QE is coming. The Fed will begin expanding their balance sheet. It will not be called QE however due to a confidence crisis.
In fact, Jerome Powell addressed this repo event during his FOMC conference. He did say that the Fed may have to return to expanding their balance sheet sooner than anticipated.
For the layman, this means that banks were running out of money. Because of the shortage of money, short term rates jumped to 9%…much higher than the 2.25% Fed funds.
The whole system would have froze. No transactions would have gone through. If you think I am exaggerating, you must know that this almost occurred in 2008. The US Treasury had to bail out the banks using American taxpayer money.
I would watch these repo amounts for the next month or two. If we see hundreds of billions of dollars still having to be injected into the system, then we are definitely approaching some problem.
The mainstream media is saying that most of this can be explained by Japanese banks being closed…a large market for providing short term funds…
A short post but I believe you need to be aware of this. We are seeing the confidence crisis approach. The Fed seems like they don’t know what they are doing, and they may be losing control of the short term interest rates. Watch how much more injections are made into the system.
By the way, the US Dollar is still up on this news. Gold is still holding that support of the 4 hour head and shoulders neckline.