To say that the Federal Reserve has been busy over the last few weeks would be a huge understatement. The central bank may be projecting an image of control. According to them, the financial markets are simply experiencing technical issues and seasonal bottlenecks such as quarterly tax payments.
However, financial experts and economists know that something may be wrong in the U.S. economy. To them, the Fed appears to be pulling out all the stops to keep the markets stable. We talked to Mati Greenspan, and asked if the Fed is combating a recession. The analyst replied,
They are trying their best.
Try as they might, a widely-followed investor says that a recession will eventually rear its ugly head.
A month ago, the central bank reduced interest rates to 1.75 percent. It appears that they are not done yet. The Fed targets another rate cut by the end of the month. If that pushes through, the central bank will have reduced rates three times in four months.
In addition, the Fed has been busy putting out fires in the repo markets. What started as a temporary operation has expanded into a whopping daily injection of $165 billion on both the temporary and permanent facilities.
If that’s not enough to convince you that the Fed took out its bag of tricks, they are also buying Treasury notes to the tune of $60 billion per month. As a result of these activities, the Fed’s balance sheet grew by $200 billion in a month.
Even the former head of the Bank of England, Mervyn King, appears to be following the Fed’s moves. He believes that the banking system is hurtling towards another financial crisis as he urges the Federal Reserve and other central banks to have a closed-door chat.
Investor Charlie Bilello also seems to be closely watching the Fed’s activities. He says that there’s nothing that the Fed can do to ward off a recession once the cycle has turned. Rate reductions and money printing endeavors just won’t cut it.
The popular investor relied on historical data to support his claims. He mentioned that the rate cuts in June 1989, January 2001, and September 2007 failed to stop recessions that erupted in July 1990, March 2001, and December 2007.
On top of that, Bilello also noted that the rate cuts happened after a yield curve inversion and an earnings downturn. We are seeing a familiar pattern today.
We are a week into the Q3 earnings season and many companies have missed consensus estimates. Big names such as Boeing, Caterpillar, McDonald’s, Goldman Sachs, and Well Fargo have missed expectations. Some even cut guidance for the rest of the year. As a result, the earnings of S&P 500 companies are down by 3% year-over-year with almost 20% of companies reporting.
The combination of negative S&P 500 growth and an inverted yield curve appears to be a precursor to a recession according to the investor.
In the end, the Fed can pump billions into the financial system and cut rates as much as they want. However, Bilello says that these are not magic bullets that will solve the problems facing the U.S. economy. Once recession rears its ugly head, even the mighty Fed can’t do anything to stop it.
Last modified: October 24, 2019 1:23 PM UTC