In addition, the Federal Reserve stated that it will cease selling government securities on its balance sheet when the current selldown hits $3.5 trillion. The stated policy before was that the selldown would continue unabated through the year. These securities are on the Fed balance sheet as part of the QE policy of former Fed Chairman Ben Bernanke.
Some analysts suggest that the new restraint on increasing interest rates and the reversal on unwinding QE liquidity is due to concerns about an impending slowing of the U.S. economy. The Fed is projecting 2019 at 2.0% growth, down from 3.0% over the last 12 months.
It would not be unusual to think that a recession might be in our near-term future. After all, the average time period between recessions is 3.2 years. It has been 9 years since our last recession. If we make it to June without a recession taking hold, we will have set a record for the longest period in the United States without one.
I think it is likely that the Fed determined that further interest rate hikes now would be all that is necessary to push the economy towards the edge considering how long in the tooth the expansion is.
I have no doubt that if Hillary Clinton had been elected we already would have been in recession. The election of Donald Trump was a tremendous psychological boost for the producers in the economy. The subsequent tax cuts he was able to shepherd through Congress has provided additional fuel to the expansion. Nevertheless, all expansions end. The length of this one will soon set a record. Can it continue long enough to provide a lift to Trump's re-election efforts or will a recession seal the deal for a Democrat to move into the White House in 2021?
We will have to wait to find out the answer to that question.
However, I believe there was another reason that the Federal Reserve stopped raising interest rates and is retaining those $3.5 trillion in QE government securities.
Look no further than interest rates in Europe and Japan.
Consider the fact that an incredible $9.0 trillion in bonds around the globe are yielding less than 0%! The value of global bonds with negative yields has increased by over $3 trillion just since October, 2018.
This is the world we live in today? People are willing to give their money to someone with no promise of a return on their investment. In fact, the lender actually is paying the borrower rather than the other way around. It is nothing short of insanity.
I like the observation that Elliott Wave International made in its comments accompanying this chart.
"Properly functioning economies and debt markets do not have negative-yield bonds".I should say so.
Where are these negative interest rates? Most are in Europe.
It probably does not come as a surprise that countries like Switzerland, Japan and Germany lead the list. These are considered to have solid economies and stable political outlooks.
However, negative bond yields also exist in Italy, Spain, Portugal, France, Ireland and Slovenia????
It was not too long ago that Italy, Spain and Portugal were all considered major default risks. France also has negative yields even as yellow vest protestors riot in the streets against the government?
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| Credit: @CharlieBilello |
I have to think that the Federal Reserve is keeping a close eye on these negative bond yields and wondering just how big a gap that it can leave in interest rates between these countries and the United States.
The pause in interest rate increases by the Fed looks to me to be just as much about concerns about what is going on in Europe and Japan as is their view of the U.S. economy.
At the same, the Fed still retains some flexibility to lower rates if they have to if a recession comes into further view.
Let's hope that the Fed knows what it is doing. I have no desire to see negative yields in the United States. I have no desire to find us in the same place that Japan and these European countries find themselves in today.
It is one big negative place to be.
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