The Fed’s Sobering Outlook Divides US Markets — Interest Rates
It was a decision that everyone expected.
Jerome Powell and his Federal Reserve compatriots held US interest rates steady at 0.25%. A level that they will likely stay at for quite some time.
After all, despite Wall Street’s optimism, the US has a long road to recovery ahead. Fixing their economy is going to take years.
And Powell made sure to remind everyone of that fact…
All options on the table
The Fed is projecting a 6.5% decline in US GDP by the year’s end. That’s on top of a 9.3% unemployment rate too.
Suffice to say, it will be a rough year.
Beyond 2020 though, the pain will likely continue.
Next year, the Fed is forecasting for a steady rebound. One that won’t return them to pre-pandemic levels, but put them on the right track.
But in order to ‘stimulate’ this recovery, rates will be staying lower for longer. As they officially noted:
‘…the Committee decided to maintain the target range for the federal funds rate at 0 to ¼ percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.’
As we all know though, interest rates aren’t the Fed’s favoured tool anymore. No, they prefer the far more direct approach of QE nowadays. Pumping money directly into the economy for better or worse.
A measure that will also continue (emphasis added):
‘To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.’
In other words, the helicopter money will continue — perhaps even increase — all in the effort to retain our ‘smooth market functions’.
Surprisingly, this is usually the sort of news Wall Street loves. Low rates and free cash have been at the heart of the recent rally.
The NASDAQ was certainly following that line of thinking. Reaching a new all-time high of 10,020.35 points. Closing above five digits for the first time ever in the index’s history.
Comparatively, the Dow Jones was far more sceptical. Retreating by 1.04% as the Fed’s sobering outlook gave pause to the trading euphoria of late.
It truly is a tale of two markets right now. And the question on everyone’s mind is, what comes next?
Greed and fear
Truthfully, no one really knows what will come next.
People can speculate, or hazard a guess and they may end up being right. But right now, they can’t be certain of anything.
Even the Fed can’t be certain of their outlook…
What they are doing, with interest rates and QE, is unprecedented. We’ve never seen markets behave quite like they are.
Short term, it has led to one of the most surprising rallies in recent history. Long term though, we could be setting ourselves up for a far bigger crash.
Indeed, our in-house investing guru — Jim Rickards — believes we are doing exactly that.
He can see the makings for a much bigger crisis. One that could see investors wiped out across the board. And he believes we should all be prepared for this possibility to happen soon.
That’s why Jim has been building his ‘financial pandemic shelter’. Taking a proactive approach to protecting his wealth. And you can do it too.
Because the Fed is certainty right about one thing. Right now, it’s a challenging time for any economy.
For The Daily Reckoning Australia