Danielle DiMartino Booth | Banks Have Powell’s Number Now
Danielle DiMartino Booth | Banks Have Powell’s Number Now By Albert Lu for Sprott Media
President Trump wants the Federal Reserve to lower interest rates further. But Federal Reserve Chairman Jerome Powell sees little reason to do so.
In his message to Congress on Wednesday, Powell insisted that politics play “absolutely no role” in the committee’s decisions, adding that favorable economic conditions make further rate cuts unnecessary in the near term. In response to Trump’s call for negative interest rates, similar to those in Japan and Europe, the chairman explained his view that negative interest rates “would certainly not be appropriate in the current environment.”
Indeed, there are reasons for optimism. The U.S. economy added 128,000 jobs in October and both unemployment and consumer inflation appear to be holding at healthy levels. Furthermore, both the Dow and S&P 500 closed at record highs on Wednesday. All this despite a synchronous slowdown of the global economy and uncertainty over U.S.-China trade relations.
NOT EVERYONE IS CONVINCED
According to Danielle DiMartino Booth, CEO of Quill Intelligence, an abundance of evidence, including a slowing U.S. auto sector, points to a slowing economy. More importantly, concerns over bank liquidity appear to have the Fed backed into a corner.
“The Fed is back-pedaling … and we’re blowing up the balance sheet,” she said in reference to the Fed’s temporary operations in the overnight lending market.
The bond purchase operations, which some have criticized, came in response to a liquidity crunch in September that briefly pushed the overnight lending rate from 2% to 10%. The Sept. 17 incident was the first time the Fed interfered in the overnight market since the financial crisis. Banks short on cash typically access the repurchase agreement (or ‘repo’) market to cover their obligations each night. Spiking overnight rates can indicate stress in the banking system.
The Fed’s repo operations and subsequent T-bill purchases have prompted comparisons to the notorious quantitative easing program which, over three rounds spanning roughly six years, saw the Fed increase its balance sheet by $4.5 trillion. While the programs are not identical, particularly in the duration of the targeted assets, the similarities are hard to ignore.