The Fed Can’t Save You
The Fed Can’t Save You by Jason Simpkins for Outsider Club
The U.S. unemployment rate is 3.8% and the U.S. economy hasn’t contracted since the first quarter of 2014.
And yet the Federal Reserve is gearing up for a rate cut.
That shouldn’t excite you — it should scare you.
When is the last time the Fed issued a preemptive rate cut?
And what’s the next step if that rate cut doesn’t work?
To hear Donald Trump talk, you’d think Jerome Powell was Paul Volcker — driving interest rates mercilessly high.
But, in reality, rates are incredibly low (2-2.5%) and likely to be even lower by next week.
Anyone who actually has a savings account (Do they still even exist?) will tell you a 2% rate is virtually nothing.
Interest rates in Japan and Europe are below zero, but is that really what we’re shooting for here? Are we supposed to charge people money to keep their cash at a bank just because Europe is?
Well, we might if we’re hit with a recession, because there’s simply not much room to drop them.
Powell says if things get really bad, the Fed could go back to buying bonds the way it did in the last recession.
If you recall, the central bank took on $4.5 trillion in debt from August 2007 to October 2017. It’s been trying to unwind that balance sheet over the past few years, but progress has been slow.
As it currently stands, the Fed still has about $3.8 trillion in assets on its books.
How much more can it take on?
Surely, the government will step in though, right?
Back in 2009, President Obama signed that giant $787 billion stimulus.
That helped, but looking back, most every economist agrees it actually should have been bigger.
And it would have been had there not been so much opposition from fiscally conservative politicians egged on by the Tea Party movement.
Still, it was passed with a razor-thin margin, barely overcoming a filibuster with 61 votes in the Senate.
And that was with a unified government.
How likely is that to happen today, with Democrats in the House and Republicans in the Senate?
Earlier this week, Kentucky Senator Rand Paul voted against funding the 9/11 Victims Compensation Fund, which provides financial assistance for first responders suffering from 9/11-related medical issues.
Thankfully, the money ultimately got through, but what are the odds Paul votes for stimulus spending if he won’t even pay to take care of our country’s most cherished heroes?
“Fiscally conservative” Republicans could almost certainly stomach another deficit-funded tax cut. But the Democrats won’t let that fly without spending appropriations.
And in both cases, we’d be adding to a deficit that’s already set to surpass $1 trillion this year.
Given that, how big could a new stimulus package even be at this point?
Not big enough to matter, I’ll tell you that.
After all, even the last multitrillion-dollar tax cut didn’t do anything to spur the economy. If it did, we wouldn’t be in this situation.
So what’s left?
I don’t know.
Maybe you think I’m cynical, though.
And maybe you’re right.
Maybe there’s plenty of room for the Fed to cut rates and buy up bonds. And maybe Democrats and Republicans will unite under a common purpose (in an election year no less) and pass a massive stimulus package that suits everyone.
Except none of that is working anywhere else.
Like I said, Japan and Europe have already tried this. They’ve taken rates negative. The ECB and Bank of Japan have already been buying bonds.
But it hasn’t helped.
Indeed, there’s no certainty that any of the aforementioned tactics would save the economy from a recession, even if they were somehow deployed.
They would weaken the dollar, though.
And that’s why investors should be buying gold right now.
Both stocks and gold are going up in anticipation of a rate cut, but only one of those things will keep going up in the event of a recession.
And it ain’t stocks.
So if you haven’t yet taken the necessary steps to safeguard your capital, you should do so now.
That could provide some really nice leverage going forward.
But whatever you do, don’t rely on the Fed or Congress to bail you out.
Because they won’t.