Pity the guys now running the Fed. They’ve inherited an economy that requires ever-bigger infusions of new credit and ever-lower interest rates to avoid financial cardiac arrest. But with interest rates already perilously close to zero the usual leeway is no longer there.
Making the best of a bad hand, Fed chair Jerome Powell has been cutting the Fed Funds rate but managing expectations for future cuts by calling the current ones “recalibration” and “insurance.” In other words, “don’t expect a quick excursion into steeply-negative territory. In fact this latest cut might be all there is.”
But the economy, like any addict, is profoundly uncomfortable with not knowing where the next fix is coming from and is behaving accordingly. From just the past couple of days’ headlines:
Now equities are picking up the anxious vibe. See Global stocks plunge for a second day to start Q4.
What happens next? Almost certainly, a “coordinated” round of aggressive easing by the US Fed, the ECB and BoJ. With some unconventional coercion thrown in by the People’s Bank of China.
As for the timing, it’s just a question of “the number.” That is, how far does the S&P 500 have to fall before the stampede begins. Since this question will be answered by a bunch of largely clueless men dripping fear sweat and trying to figure out why their models have stopped working (and more poignantly why their life’s work has turned out to be a fraud), the number is unknowable in advance.
But it probably won’t take too many more days like the last couple before the Fed issues its “whatever it takes” statement, cuts rates by a half-point or more, and initiates a QE program that includes equities along with bonds.
Oh, and before a US-China trade deal is signed that accomplishes little but is sold as “historic” and “huge.”
And before a trillion-dollar infrastructure plan passes both houses of Congress with bi-partisan support.
Stocks will of course pop on these announcements, which makes the “short everything in sight” impulse less than the sure thing it appears. But the initial upward thrust won’t hold because there are limits to both how far interest rates can fall and how big central bank balance sheets can become before even the pretense of capitalist free markets evaporates. We don’t know what those limits are but they’re definitely out there.
Put another way, an economy that has been LBO-ed by its government is no economy at all.