The Fed wants us to believe that it remains hawkish, that it will begin the process of unwinding its $4.5 trillion balance sheet next month and that it will hike rates again this year.
The markets aren’t buying it, even for a second.
The top performing asset class after the Fed concluded its announcement on Wednesday was… TREASURIES: the asset class that should DROP hard if the Fed intends to raise rates.
Apparently bonds didn’t believe that Fed Chair Janet Yellen was going to hike rates again for more than a few hours. As a result of this, the long-Treasuries ETF (TLT) actually OUTPERFORMED the S&P 500 as well as the NASDAQ post the FOMC.
Again, LONG-Treasuries beat Tech stocks after the Fed FOMC. The market doesn’t believe the Fed will be hiking rates again this year. Heck, the market doesn’t even believe that the Fed has a clue anymore.
As for the Fed’s proposal to unwind its balance sheet… does anyone remotely believe this will happen to any significant degree?
We know from Fed transcripts that Janet Yellen was worried about a balance sheet unwind as far back as 2009 when the Fed balance sheet was just $1.0 trillion. Somehow that same woman is now fully confident the Fed will be able to do this now that the balance sheet is the size of a G-7 country’s economy at $4.5 trillion?
Give us a break.
The reality is that the second the stock market begins to take a nosedive, the Fed will begin walking backs any talk of balance sheet normalization. Indeed, the only reason the Fed is even floating this idea is because stocks are at nosebleed levels. And with the Fed having failed miserably to generate economic growth, job creation or anything else, stock levels remain the one area of success to which the Fed can point.
Are they really going to jeopardize that, especially since Fed Chair Janet Yellen openly admitted the Fed considers “asset price levels” for its rate hikes (asset prices in Fed speak means stock levels)?
Nope.
The second stocks drop, the Fed will end its hawkishness. Indeed, judging by the looks of the $USD, the markets already know that the Fed will probably be talking about easing within 12 months time.
Put simply, the markets have called “BS” on the Fed this week. The one clear takeaway is that the Fed is no longer in control and that the markets smell “money printing” in the future.
This is going to be like rocket fuel for Gold and other inflation trades. Already the precious metal has broken out of a seven-year downtrend. And once the Fed stops walking back all talk of balance sheet reduction in the coming weeks, Gold is going to go THROUGH. THE. ROOF.
If you’re not taking steps to actively profit from this, it’s time to get a move on.
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Best Regards
Graham Summers
Chief Market Strategist
Phoenix Capital Research