Rates are on hold, but what’s happening to the money supply?
$95 billion a month.
That’s how much the US Fed is hoovering up out of the economy right now.
Markets were a little unsettled last week when the Fed Chair Jerome Powell said that, contrary to what a lot of people seemed to be hoping, that inflation was not dead yet, and interest rates would have to stay higher for longer until it was dead.
Some folks in America were thinking we could see the first round of rate hikes early in the new year, but I always thought that was optimistic.
So rates are on hold for now.
But I’m not sure that interest rates are really where the action is right now.
Because as I said, the Fed is hoovering up $95bn a month. They’re sucking up that cash and just killing. Extinguishing it. Gone.
This is the process known as quantitative tightening.
We had the opposite with the GFC and Covid. We had quantitative easing – where the Fed was just making money up and sending it out into the broader economy.
Now that process is in reverse. And every month, the Fed calls $95 billion (yes, that is a massive number) – the Fed calls $95 billion home and puts it to bed.
And this is the thing.
We’ve never done this before.
We tried for a little while after the GFC, but then Covid came and we never finished the job.
So nobody really knows how this is going to play out.
It’s why Jamie Dimon – the CEO of JP Morgan, one of the largest investment banks in the world – said last week that this might be one of the most dangerous economic times in the past few decades.
So far things seem to be going ok. We’ve only had a handful of banking sector collapses.
But we’re not done yet either.
Even at a current clip of $95bn a month, it’s still going to take the better part of a decade to fully unwind the Fed’s balance sheet.
Things have to go well for a long time before we’re out of the woods.
But the woods also contain the prospect of interest rates going to 7% at an outside chance.
They contain banking regulators lifting reserve requirements in the banking sector to avoid more banking collapses.
They contain the US governments debt burden getting heavier every time rates go higher.
And then there’s half a dozen geo-political nightmares just waiting to unfold.
Dangerous is probably an understatement.
That said, the global economy is always beset with risks. You can always tell a scary story if you want to.
And maybe Jamie Dimon is just managing shareholder expectations.
“Hey, we made a lot of money in the past few years. But maybe we won’t make so much money this year. These are ‘dangerous’ times after all.”
Alert but not alarmed is probably the way to play it.
JG.