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:
US manufacturing survey contracts to worst level in a decade US gross national debt jumps by $1.2 trillion, to $22.7 trillion Growth hits the wall Student loan debt soars, totaling $1.6 trillion in 2019 There is good reason to fear the repo Midwest’s faltering economies will spread pain nationwide Treasury yields sink after U.S. manufacturing weakness raises recession fears
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.
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