We get the Fed tomorrow.
The market is pricing in a near certainty that they will hold the line on rates, following the three consecutive rate cuts into the end of last year — along with the resumption of balance sheet expansion.
Let's talk about the latter.
Remember, the Fed was hinting late last year that there was (once again) liquidity stress emerging in the system.
And in December, in response to that, they didn't just restart the money printer, they did so with immediacy and size. Moreover, Jerome Powell openly explained that the economy now requires the Fed to inject $250-$300 billion a year, indefinitely, just to maintain ample liquidity.
So, the Fed officially ended quantitative tightening (extracting liquidity) on December 1st. And by December 12th, they turned the liquidity spigot back on, to the tune of $40 billion in month one, which continues in month two (a nearly half-a-trillion dollar annual pace).
And remember, in his earnings call earlier this month, Jamie Dimon described the transmission of this capital across the economy. He said that cash enters the banking system — it "shows up in wholesale deposits" (accounts held by large corporations and institutions). And he said it gets redeployed (it's not just sitting idle).
The key point: He described it not just as liquidity stabilization, but as stimulative.
In short, it looks like, and acts like QE. It's QE. And as we know, QE tends to make asset prices go up.
We talked yesterday about the rising bets on Rick Rieder to become the next Fed Chair, and his view on getting the 10-year yield lower — and with that lower anchor, bringing mortgage rates down and unlocking the housing market contribution to the economy.
With this balance sheet expansion already restarted at the Fed, Rieder could move the $300 billion annual injection from bills to 10-year notes.
That shift would be a recipe for an asset price melt-up, as it would push capital out of bonds (into higher risk assets). And pinning the 10-year in the mid-to-high 3% area (a lower and "stable" 10-year, which Rieder desires) would finance an economic boom (with cheap capital).
That would mean gold at $5k is still cheap.
