During one of the more bizarre speeches in recent history, Fed Chair Jerome Powell announced last week that the Fed will "grow its balance sheet to prevent funding issues" before stating:
"I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis."
So … the Fed is going to print money and buy debt, which is literally QE, but somehow this is NOT the same thing as the QE programs the Fed did between 2008 and 2014, according to Jerome Powell.
Powell also talked about negative interest rates, but claimed they are not a "first order" or ideal tool for the Fed. He then followed up that statement by admitting the fed would use "unconventional tools [e.g. negative rates]" if necessary.
As I recently stated, trying to find a logical explanation for what the Fed is doing is now impossible. In the last 20 months we’ve seen the Fed:
- Claim that nothing but a full-scale financial crisis would stop it from raising rates and shrinking its balance sheet, only to then turn around and abandon both policies when stocks fell 20%.
- Claim that it is data dependent and politically independent only to then turn around and cut rates despite the data not warranting it because President Trump wanted a rate cut.
- Claim that its July interest rate cut was a "mid-cycle" rate cut and not the start of an extended easing period, only to then turn around and cut rates again in September while also launching a backdoor QE program (more on this shortly).
- Claim that it is considering printing money and buying assets to grow its balance sheet, but that doing this would not be QE, when in fact the Fed has ALREADY been printing money and buying assets at a record pace and yes, it is QE.
Regarding that last point, the Fed’s balance sheet was $3.769 trillion on September 11th 2019. Three weeks later, on October 2nd, 2019, it had risen to $3.945 trillion.
That’s an increase of $176 BILLION in three weeks.
To put this into perspective, during its last major QE program, QE 3, the Fed was growing its balance sheet by $80 billion per month. The Fed has already more than DOUBLED this in just three weeks.
Indeed, the last time the Fed was growing its balance sheet this rapidly was… late September 2008, right after Lehman Brothers had imploded and the financial system was experiencing its worst financial crisis in 80 years.
So the Fed is growing its balance sheet at "Great Financial Crisis"-speeds while simultaneously claiming that it is not engaging in QE.
What does the Fed know that we don’t? Is it that stocks are about to roll over and collapse to retest the December lows?
Chief Market Strategist