What Is the Fed So Afraid Of?

The Federal Reserve is panicking.  Or at least it is acting like it, with moves of seeming desperation that are not clearly explained.

Quietly, the Fed is printing money like crazy.  But it isn’t saying what it is so afraid of.

For anyone steeped in the unhinged Keynesian theories that rule at the central bank, three interest rate cuts in 2019 are not internally logical.   The US economy is enjoying the longest sustained boom in history, now running 126 months.  And unemployment is said to be at a 50-year low.

Keynesian theory calls for lowering rates, deficit spending, and loose money when the economy is in contraction.  Not in an expansion.  

And now the Fed has cranked its money creation machines to eleven.  As the rock music parody motion picture Spinal Tap showed, eleven is even faster than the top rate of ten!

And indeed, the new money printing regime is faster than Quantitative Easing, the unprecedented monetary experiment that gushed forth almost $4 trillion beginning in the Great Recession.

Liquidity operations, more repo funding, more QE.  We refer to them generically:  more money printing.

What is going on in the Marriner Eccles Building in Washington?  Why has the Fed cranked the presses up faster than fast?

Although it’s all shrouded in mystery, we can suggest some possibilities.

Informed sources say the Fed is desperately trying to stop interest rates from flaring up… and spreading like wildfire.  

By other accounts, among them that of the Bank of International Settlements, the central bankers’ central bank, the stepped-up money printing is funding the borrowing of private hedge funds so that they don’t have to sell anything.  

And we ourselves have wondered in these pages if a major bank is on the brink of failure, with the potential of setting off cascading failures.  That’s what happened in 2008 when the failure of Bear Stearns and Lehmann Brothers triggered the Great Recession.

Like flaring interest rates, either widespread hedge fund selling, or a major bank collapse are both capable of tanking the stock and the bond markets.

As the song said, “Something’s happening here.  What it is ain’t exactly clear.”  

We think that financial conditions are very dangerous and urge our clients to move to safety.  When the Fed starts printing money the best place – the only place – to be is in gold.