Currently there is much speculation about whether the Fed will continue quantitative tightening or return to quantitative easing. In 2018, newly appointed Fed Chair Jay Powell indicated that 2019 would see four rate hikes. However, he has since backed off on that forecast.
With inflation muted, Powell recently told the Senate Banking Committee, “That gives us the ability to be patient with monetary policy and that’s what we’re going to do.” Some analysts see no rate hikes in 2019.
Powell further noted that the Fed will maintain a “more elevated balance sheet than expected.” Basically, he was saying that the Fed would hold a larger position in bonds than previously anticipated in an attempt to hold down long-term interest rates.
Currently, the Fed is selling or letting bonds mature without re-investing the proceeds at the rate of $50 billion a month. “A more elevated balance sheet” means the Fed will cut back on its reduction, thereby holding a “a larger position in bonds than previously anticipated.”
In only a few months, Powell went from being a hawk on interest rates to being a dove. What changed Powell’s mind, the weakening economy or the huge drop in stocks in December?
Some analysts are saying it was the stock market drop while others point to decreasing quarterly GDP posts. The 2nd quarter 2018 came in at 4.2%, 3rd quarter at 3.4% and the 4th quarter at 2.6%.
David Stockman, who served as Ronald Reagan’s Budget Director, says it was December’s stock market swoon, and that the Fed is the handmaiden of Wall Street, which fosters massive speculation. Still, it is easy to see the declining GDP numbers.
There also is talk of the Fed “capping” the interest rate on 10-year bonds to keep interest rates low. To do so, the Fed would have a permanent bid for the US Treasury’s 10-year bonds, thereby flooding the market with money.