Sunday, September 15, 2019

What Might An Uber-Aggressive Fed Deliver?

So the Fed's September policy meeting will happen this Tuesday and Wednesday, with the market's pulse sure to be pounding come 11am (pdt) Wednesday. Yep, even though a quarter-point cut is almost certainly what they'll get, traders in all manner of asset classes will be locked and loaded just in case.

Of course 11am is when the Fed's interest rate decision will be announced, but, pragmatically speaking, it's Powell's following presser that really counts; his every word will be analyzed as markets will be straining to get a feel for where they go from here.

And of course there'll be the tweets leading up to and after the Fed meeting. The President is on the record that he wants the Fed to cut rates by 100 basis points (1 full percent) and even restart quantitative easing (print money galore!). He argues that the U.S. should have the lowest interest rates in the world.

Never mind, for our purposes this afternoon, what it would actually say about the state of the U.S., its economy and its currency if indeed we had "the lowest rates in the world", but what if, indeed, the Fed did get uber aggressive right here? Why would they, and what would be the effect?

As for the why, well, it would be because they believe we are on the precipice of recession, if not already there; and all indications are that they don't in fact yet believe that. As for the effect, well, the label on the interest rate cut/QE bottle says that it stimulates borrowers into action and thus produces economic activity (spending) in the process.

Well, as for the presumed effect, remember those charts I featured in Thursday's video? Here they are again:

Total U.S. Consumer Debt Outstanding


Total U.S. Corporate Debt Outstanding


Total U.S. Treasury Debt Outstanding


Clearly, there's plenty of borrowing going on!

So, no, under present circumstances, we shouldn't expect the real economy to get a boost (at least not as a result of heightened debt-fueled spending) out of lower interest rates. We could however see a surge in optimism if indeed lower rates fuel higher stock prices; and of course optimistic consumers tend to spend. But, again, they're already spending, plenty! Leaving us perhaps with simply higher stock prices, which, by itself, isn't a bad thing, unless of course it's inspired solely by lower rates, as opposed to rising corporate earnings. 

And if the former (lower rates) can't this time around produce the latter (higher earnings), well, alas, the term "bubble" comes to mind...

As I type (2:50pm pdt on Sunday) currency markets are signaling pain when equity futures begin trading shortly; that would be in response to the weekend attack on Saudi oil production. 

I'll update you in the morning...

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