You don’t use up all of your ammunition before the battle even begins. The U.S. economy has not even officially entered recession territory yet, although many experts are definitely anticipating one in 2020. When that recession arrives, the Federal Reserve is going to want as much ammunition to fight it as possible. So I was horrified to learn that the Federal Reserve announced on Wednesday that interest rates are being slashed once again. We have now had three interest rate cuts in 2019 as the Federal Reserve desperately attempts to revive the stalling U.S. economy. But what are they going to do during the next recession when they have already pushed interest rates all the way to the floor and they can’t push them any lower? In addition, in recent days the Federal Reserve has decided to absolutely flood the financial system with new money in a desperate attempt to stabilize the repo market. In essence, the Federal Reserve has launched a massive new round of quantitative easing even before a major crisis has erupted on Wall Street. I can understand trying to be proactive, but in reality quantitative easing is an extreme emergency measure that should only be used in the most desperate of situations. If the Fed is creating this much new money now, what are they going to do once things really get bad? Are we destined to become the next Venezuela?
For a long time, the Federal Reserve has insisted that the U.S. economy is in good shape. If that is true, there is no way in the world that the Fed should be cutting interest rates. But that is exactly what happened on Wednesday…
In a vote widely anticipated by financial markets, the central bank’s Federal Open Market Committee lowered its benchmark funds rate by 25 basis points to a range of 1.5% to 1.75%. The rate sets what banks charge each other for overnight lending but is also tied to most forms of revolving consumer debt.
It was the third cut this year as part of what Fed Chairman Jerome Powell has characterized as a “midcycle adjustment” in a maturing economic expansion.
With rates now so close to zero, there isn’t going to be much that the Fed can do in that regard once the next recession strikes.
According to Fed Chair Jerome Powell, this latest rate cut was done for “insurance” purposes…
Powell said lowering the rate again was ‘insurance’, or protection needed because ‘weakness in global growth and trade developments have weighed on the economy and posed ongoing risks’.
If the U.S. economy doesn’t plunge into a deep recession next year, Powell and the other bureaucrats at the Fed will probably be applauded for these moves.
But if we do experience a significant economic downturn, they will be caught with their pants down.