The Fed Is Now Stuck
The Fed is now stuck... Get ready for more QE... Don't miss this week's big event...
In recent years, we've argued that the Federal Reserve would eventually find itself 'between a rock and a hard place'...
As regular Digest readers know, the Fed's primary policy tool has long been manipulating short-term interest rates. When the economy slows, the Fed typically cuts interest rates to stimulate inflation. When the economy recovers, it then raises rates to remove that stimulus.
Now, you could argue that the Fed has no business manipulating rates in the first place – that they're a crude tool that distorts the economy, leads to gross malinvestment, and is largely responsible for three massive asset bubbles in the past 20 years alone.
Regardless, even the staunchest Fed proponent must admit that this tool has become far less effective over time...
For decades now, each Fed "cutting cycle" has required lower and lower interest rates to produce the same effect of stimulating the economy. Likewise, the Fed has been forced to halt its rate-hike cycles at lower and lower peaks before yet another recession or market shock has inevitably sprung up.
Most recently, following the housing bust, the Fed cut interest rates to effectively 0% and held them there for nearly seven years. Even now, after three years of "tightening," short-term rates are barely over 2% – near their lowest levels in history.
Yet, even at these relatively low levels, we've already seen signs that the economy is beginning to weaken, leading the Fed to abruptly halt its rate-hike plans last month.
In short, just as we predicted, it appears the Fed is now stuck...
It can't continue to raise rates without derailing the so-called "recovery." Yet, if it doesn't continue to raise rates, it will have little room to cut them when the next crisis inevitably arrives.
So, we weren't surprised to learn that the Fed is now "debating" the use of alternative tools as well. As news service Reuters reported on Friday...
U.S. central bankers are currently debating whether it should confine its controversial tool of bond buying to purely emergency situations or if it should turn to that tool more regularly, San Francisco Federal Reserve Bank President Mary Daly said on Friday.
"In the financial crisis, in the aftermath of that when we were trying to help the economy, we engaged in these quantitative easing ("QE") policies, and an important question is, should those always be in the tool kit — should you always have those at your ready — or should you think about those are only tools you use when you really hit the zero lower bound and you have no other things you can do," Daly told reporters after a talk at the Bay Area Council Economic Institute.
"You could imagine executing policy with your interest rate as your primary tool and the balance sheet as a secondary tool, but one that you would use more readily," she added. "That's not decided yet, but it's part of what we are discussing now."
In other words, don't be surprised if the Fed announces a new – and permanent – quantitative easing ("QE") program soon...
Of course, it's not certain this policy would be a panacea either.
While the first three rounds of QE certainly helped boost asset prices here in the U.S., it's still not clear how much it helped the real economy.
We'll also remind you that unlike the Fed, the European Central Bank has continued to stimulate over the past three years. Yet, despite ongoing QE and short-term rates that remain at 0% or below, both European markets and the eurozone economy have been weakening rapidly.
For now, we remain cautious...
We believe the downside risks to stocks and the economy are greater than any time since this long bull market began.
But we also expect the Fed and other central banks to do everything they can to keep this boom going as long as possible... which means we'd be foolish to get too bearish just yet.
For now, our advice remains: Stay long, but stay "hedged"... and keep a close eye on your trailing stops, just in case.
We'll also encourage you to join our friend Dr. Richard Smith for his Bull vs. Bear Summit this Wednesday, February 13 at 8 p.m. Eastern time. You'll hear from several noted "bulls" and "bears" – including my colleagues Dr. Steve Sjuggerud and Dan Ferris – who will share exactly how they're preparing their portfolios for what comes next.
It's absolutely free to attend. Just click here to reserve your seat.
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In today's mailbag, an Alliance member shares some additional "boots on the ground" perspective on the U.S. economy. What are you seeing out there? Let us know at feedback@stansberryresearch.com.
"Hi, I know all your editors have their favorite indicators, but having spent 40 years in production agriculture, some of my indicators are slightly different. The following quote – from one of my sources – tells me the economy (and market) have reasons for strength:
"'Wholesale choice ribeyes started the year near all-time seasonal highs and had since moved higher. Relative to fed cattle prices, ribeyes have sold nearly six times higher on a per pound basis which is a record multiple for Jan/Feb. YTD beef production through last week was down 2.4% year over year, while ribeyes are trading 11% higher. We guess that the stronger meat prices are the result of better U.S. demand from a generational low unemployment rate.'
"If you can afford ribeyes, might you also be able to buy a few stocks?" – Paid-up Stansberry Alliance member Gary R.
Regards,
Justin Brill
Baltimore, Maryland
February 11, 2019