Pro Perspectives 10/30/19

October 30, 2019

The Fed cut rates again today, meeting the market’s expectations.

Remember, just 10 months ago, they made the ninth rate hike in three years, and arrogantly told us that quantitative tightening was on “auto pilot.”

Since then, they’ve stopped QT, cut rates three times, and started expanding the balance sheet with an eye toward buying almost half-a-trillion dollars worth of Treasury bills by the second quarter of next year.

While the media has a fun parsing words and hints about whether or not the Fed could cut rates again, or pause, it’s the global balance sheet where all of the attention should be.

Let me repeat, the Fed has told us (earlier this month, and Powell tried to explain for a second time today) that it plans on buying close to (maybe more than) half-a-trillion dollars of Treasury bills.  That’s aggressively expanding this balance sheet that has already stopped shrinking, and now grown by more than $200 billion since September.

And it is primarily because of this problem — the yield curve inversion of the 3-month tbill to the 10-year note.  This was driven by the mistakes of the Fed’s quantitative tightening program, and proved (the inversion) to be not just a signal, but a real liquidity problem for short-term interbank loan market.

So, the Fed is “replenishing” global liquidity.  And the ECB is scheduled to do the same, starting Friday.  The Bank of Japan meets tonight.  Will they join the party?

The BOJ is already in unlimited QE mode as buyers of unlimited 10-year Japanese government bonds (when necessary), to keep the yield pinned near a zero yield.  However, Kuroda has hinted that they might add a twist to their QE by controlling the yield curve at the shorter end of the government debt market (following the lead of the Fed).

Bottom line, as history has shown us, this should all be very positive for global asset prices (they go UP).