Since the early-1980s, the FOMC (Federal Open Market Committee) has met every five to eight weeks, around eight times a year, to make critical decisions about US interest rate policy and monetary supply. For traders, FOMC meetings are a highly significant event as the news that emerges from them tends to have pronounced effects on the broader markets. On June 19 the FOMC will convene again, and this time everybody is taking notice.
Quantitative Easing The History
The legacy of the 2008 financial crisis has been low growth, low inflation and low-interest rates. Low-interest rates encourage economic activity, the logic being that it makes more sense to use your money when rates are low than to leave it sitting in a bank. But what happens when rates are at zero, and this still fails to kick-start the economy?
Precisely what happened after the last crisis. With rates at, around zero in some parts of the world and still no growth, many central banks resorted to quantitative easing. When normal market operations, like interest rate adjustments, fail to achieve the desired result, central banks only have unconventional measures.
Such as quantitative easing, at their disposal. QE is a controversial monetary policy in which central banks create money and use it to purchase securities. Such as government bonds, back from the banks. They get done to inject capital into the financial system and encourage economic activity like lending and investing.
The Federal Reserve relied on QE from 2008 to 2014, increasing the country’s monetary supply by some $4.5 trillion in the process. QE may have helped the US out of the 2008 financial crisis. However, the concern has always been how to get the economy off the teat from free money and low-interest rates.
The FOMC brought its easing policy to a close in October of 2014. However, it kept interest rates at zero until 2015, finally raising them to 0.5% in December of 2015. Between 2016 and 2018, it raised rates a further eight times, reaching a rate of 2.5% in December of 2018.
The Fed Vs the White House
The Federal Reserve is supposed to operate independently from the White House, but since President Trump was elected, he has been applying increasing pressure on it to bend the knee. Even going as far as to suggest that his Chinese counterpart has an advantage because the People’s Bank of China has to do everything he says, What does the Fed want? Full employment and a stable inflation rate at around 2%.
What does the White House want? By and large an infinitely growing stock market and the appearance of a booming economy, especially so close to election time. Back in 2018 Trump said that the FOMC had “gone crazy” when it raised rates three times in a year and got set to raise them for a fourth.
Lately, he has been on the warpath again, saying that “they really slowed us down” and that they should do whatever is necessary to boost the economy, even a return to QE, which he opposed when Barack Obama was in office.
Why the next two FOMC meetings are important
Fed Chair, Jerome Powell never explicitly stated that rates would get cut during the conference held at the Federal Reserve Bank of Chicago earlier this month, but he did leave the door open for it. Ongoing US trade disputes with China and Mexico.
Like a general slowdown in the global economy, have been put forward as reasons for this change of policy. The market is expecting at least one rate cut before July, which only leaves the June 19 meeting and the next one to get held at the end of July.
According to the CME group, futures markets are currently predicting a 1 in 4 chance of the Fed cutting rates on June 19 and a 3 in 4 chance of it cutting rates by the next meeting at the end of July.
If the FOMC cuts rates, many are expecting the S&P 500 to rally shortly after that. Goldman Sachs has been preparing its clients for just this, having identified health care and consumer staples as stocks that tend to outperform in the event of a rate cut.
Trump would do almost anything to secure a stock market rally as the 2020 elections draw near, but gold’s recent surge to highs last seen in April of 2018 may suggest that the market is pricing in the risk of an economic slowdown as well as a return to low rates and QE.
Will Trump have his way? Will it be stocks or gold? One thing’s certain. It’s going to be an exciting summer of trading.