The Fed just issued an open invitation.


Last night the Fed confirmed a pause in interest rate hikes and signalled that the balance sheet run-off may no longer be on auto-pilot.

Two weeks ago when talking about the cost and volume of money in the world’s largest economy, I made the following point:

“Whilst ‘cost’ is continually discussed in the press, ‘volume’ remains a silent and blunt instrument that will surely be grappled with soon.”

Well, it didn’t take long.

Succumbing to pressure from the President, Wall Street, the Euro-Sino growth dislocation from the US, and a lack of internal data as a result of the US Government shutdown, Fed Chair Powell broke his silence on the balance sheet run-off by saying:

“The committee would be prepared to use its full range of tools, including altering the size and composition of its balance sheet, if future economic conditions were to warrant a more accomodative policy that can be achieved solely by reducing the federal funds rate.”

So, either the auto-piloted balance sheet run-off is probably a little more provocative than just ‘watching paint dry’ as prior Fed Chair Yellen used to say; or the Fed has decided to buckle to the growing pressures mentioned above.

Regardless of the reasons and the inevitable nuancing by global commentators, the ‘normalisation problem’ is being swept under the carpet and the market went on a tear last night as a result of this capitulation.

As discussed on multiple occasions, the great lakes of free and easy money created by the 5 major Central Banks in response to the GFC, continue to drive equity and bond markets.

Mario Draghi recently confirmed he will not be draining the Eurozone’s €5.1 trillion lake, and Jerome Powell has pretty much confirmed that whilst there will be some more draining, he and his colleagues may choose to alter the gap between the floodgates.

Also, the US equity market continues to be unperturbed by another possible shutdown, a long road to possibly nowhere with the China trade talks, slowing growth in Europe and China (which surely will effect US growth); and the Brexit train-wreck.

Instead, markets have seized on a “patient” Fed both in terms of interest rate movements (noting that Powell has gone back to inflation being the key driver for further moves up) and a Balance Sheet run-off that may be taken off its US$50 Billion/month auto-pilot.

And, with inflation returning as the Fed’s key metric, it’s continued absence will most likely present the Fed with plenty of time to kick the QT can down the road.

That’s all a pretty potent recipe for risk asset rocket fuel - with some sparks coming from a pretty successful US reporting season with some solid earnings results (e.g., Boeing’s stellar report last night and an apparent Apple reprieve due to services growth, even though it was slightly lower than the prior quarter).

On the other hand, cratering growth in two key ‘pick and shovel’ bellwethers, namely NVIDIA (for tech) and Caterpillar (for industrial growth) should be providing some pause for thought - but, not today.

Instead, the Fed has again “patiently” opened its doors to any and all passing blood suckers, and they are starting to feast after a dry December.


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