Gold News

2019’s Dovish Fed Turn

Can Powell ignore the markets...?

CENTRAL BANKS have no economic magic. No financial panaceas. No money miracles, writes Bill Bonner in his Diary of a Rogue Economist.

They can't really make an economy run better.

They can't raise real wages or increase the wealth of a society. They don't produce anything of value. They don't provide any service that you would willingly pay for.

All they can do is manipulate the amount of money and credit. That is, they can mislead people about how much credit is available...and at what cost.

For example, they can lower the price of credit by cutting rates...encourage people to borrow...and cause a credit boom on Wall Street. That increases the amount of money in the system. But every extra penny is borrowed, which also increases the amount of debt.

Alas, it has no way to increase the real output of Main Street...which is how debt is paid. Debt goes up much faster than income; that's the story of the last 30 years.

And today, debt – which caused the crisis of 2008-2009 – is higher than ever. From student debt to corporate debt to government debt – it is all setting records. Bloomberg:

"US student loan debt outstanding reached a record $1.465 trillion last month and one particular set of borrowers is having a hard time paying back their loans, according to a Bloomberg analysis of student loan securitization data.

"This debt is raising fiscal risks. 'Over 90% of student loans are guaranteed by the US Department of Education, meaning that if a recession causes a rise in youth unemployment and triggers mass defaults, this contingent liability could prove burdensome for the US government budget,' said Paul Della Guardia, economist at the Institute of International Finance..."

And now the students and ex-students, businesses, households, and the government all depend on the Fed's low interest rates.

One famous person who depends on low rates is POTUS himself.

Mr.Trump is, after all, a leveraged real estate developer, as well as a politician and reality TV star. Bloomberg News reports that the president is already paying the price of higher rates:

President Donald Trump has repeatedly attacked Federal Reserve Chairman Jerome Powell's interest-rate increases as a drag on US economic growth. They're also cutting into his own fortune.

Every time the Fed raises rates, Trump's payments on some $340 million in variable-rate loans go up. Since his January 2017 inauguration, the Fed's steady rate hikes may have added a cumulative $5.1 million a year to his debt service costs, according to a Bloomberg News analysis of the president's financial disclosures and property records.

Two years ago, the Fed decided to stop making its Mistake #1 (keeping rates too low for too long) and switch to Mistake #2 (raising rates in anticipation of the next crisis...and thereby triggering the crisis). Then, at least, it would have some rates to cut when the crisis came...and it could then make Mistake #3 (cutting rates in a panic).

And that is the real question for today. There is no crisis, yet, so there are only two choices: Will the Fed stick with Mistake #2 or go back to Mistake #1?

If you've been following our Diary, you know that we've made an important prediction: The Fed will never voluntarily allow rates to return to normal.

It can't let rates go back to normal because it has spent the last decade training the economy to live on abnormal ones. Now, like a patient on life support, the heart would stop beating if the Fed were to pull the plug.

Again, looking on the bright side, that is what should happen. The Fed created a debt-drenched monster; it should have the courage to bury it.

But that's not going to happen. The Fed may not want to cave in to Mr.Trump's demands. But it definitely doesn't want to watch the Dow go down 1,000 points, either.

Bloomberg explains why another rate hike is unlikely:

"Donald Trump's hectoring aside, it's exceedingly rare the Federal Reserve raises interest rates when stocks are behaving this badly.

"In fact, were policy makers to follow through [in December] it would be the first time since 1994 they tightened in this brutal a market. Right now, the S&P 500 is down over the last three, six and 12 months, a backdrop that has accompanied just two of 76 rate increases since 1980."

Most likely, rates will go nowhere. Instead, the Fed will put the QT (quantitative tightening) program on pause, "to give it time to assess the incoming data."

The announcement will sound reasonable. It will be greeted by Donald Trump and investors with considerable relief. The Dow should head up.

But the "data dependent" path is complete BS. It is like an alcoholic who gives up booze for "as long as his nerves don't start acting up." He'll be back on the sauce within hours.

The Fed has practically fallen off the wagon already. It may or may not simply pause. But now or later, stocks will continue to fall. And then, the Fed will pick up the bottle and go on another credit bender.

Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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