The market got its wish. A short, scary liquidity driven sell-off in the market and the FED backed off. A FED that has always said they are not affected by the markets and are driven solely by their two mandates.
- Stable prices (keep inflation in check)
- Full employment
In reality, it appears they have three additional mandates driving their behavior: concern about a stable and growing US stock market, ample liquidity in the financial markets, and global stock market strength.
None of these seemed to be of concern back in October when the FED said they were “a long way away from neutral on interest rates” and the FED balance sheet reduction was on “auto-pilot,” with reductions of ~$50 billion a month.
Fast forward to today and the tune has changed completely. Granted, they have been walking back some of those October statements over the last month or so, but now it’s a 180. Going from four interest rate hikes in 2019 to maybe one – and even that is “data dependent.” The FED is contemplating now the “end” of their balance sheet unwinding, even though they have only drawn down about $600 billion and are now expecting to reduce it by another $300 billion. Leaving their balance sheet going from $800 billion before 2008 to $4.4 trillion via all the quantitative easing, then finishing the unwinding at roughly $3.5 trillion (yes, we would all love that to be our personal balance sheet!).
The bottom line is everyone was wondering who was going to finance the $1 trillion annual deficit, and now it looks like we have found our answer. The FED is no longer afraid of running a large balance sheet, as well as a 100 to 1 leverage ratio – and we can also infer that, when the next economic downturn happens, they can increase their balance sheet to help prop up the economy.
Following the FED announcement, take a look at how the dollar reacted to the FED statement:
You can see that Gold was a mirror image of the dollar.
Both U.S. and especially International markets cheered the FED with a bounce after the initial release of the statement. We are still in the middle of the congestion area that we have discussed many times over the last couple months. The good news is that the market is above its 50-day moving average and above the breakdown level around 2620. The bad news is it’s still sitting below its 200-day moving average (which is considered healthy for a Bull market) as well as overbought on a short to intermediate timeframe. This is generally called a ‘Decision box,’ which means the market will need to make a decision whether it is going to go up or down. We will see what the market’s decision is over the next month or two, but having the “FED put” return certainly makes us lean more to an upward resolution.
As always, we welcome your feedback as well as your questions.