Is The US Economy Veering toward A Fed-Induced Recession?
The comments below are an edited and abridged synopsis of an article by Stefan Gleason
The Trump administration has been citing low unemployment numbers as evidence of a strong underlying economy. But if the economy is strong, why can’t it take any more interest rate hikes?
White House National Economic Council Director Larry Kudlow insisted recently that the economy still looks good, yet he conveyed concern over interest rates. He called on the Federal Reserve to take the drastic step of an immediate 50 basis point reduction in its benchmark rate.
President Trump’s nominee to the Fed Board of Governors, Stephen Moore, has called for the central bank to start cutting rates.
An alarming development is the partial inversion of the yield curve. When shorter-term Treasuries yield more than longer-term Treasuries (an inversion), it suggests investors are pessimistic on economic growth. An inverted yield curve often presages a recession.
If the Fed acted immediately to slash short term rates, it could undo the yield curve inversion.
President Trump also wants the Fed to stop reducing its balance sheet, which since the 2008 financial crisis has been loaded up with trillions of dollars in Treasury and mortgage-backed securities.
Fed Chair Jerome Powell said he wanted to normalize rates and shrink the central bank’s balance sheet. But it seems clear that monetary policy will have to continue operating in crisis mode in order to stave off a recession.
Trends forecaster Gerald Celente issued a warning that the Fed needs to move now on rate cuts to counteract weakening US GDP and lower corporate earnings. He thinks that Fed inaction will lead to a rapid economic and equity market downward spiral.
Equity market investors seem oblivious to downside risks. But they should use the recent rally in stocks as an opportunity to convert some of their paper profits into safe havens, including precious metals.