April 9, 2020
The Fed did more this morning. For those that were worried about the high yield bond market. That’s no longer a worry. The Fed is now in.
If there was any confusion on what the objective is here for the Fed, for the Treasury and for the White House, with the flood of liquidity, cash handouts, forgivable loans, backstops and guarantees — as Powell said today, it’s “for the common good”, “we need to make them whole.”
As we’ve discussed, this devalues cash. And that, ultimately, will reset the value of everything (consumer products, consumer staples, stocks, real estate, commodities, everything). That will come at some point, hopefully when the economy is recovering and beginning to thrive, once again.
So the big question is: How will the Fed respond?
When we get to the other side on this virus, will the Fed panic when they see a spike in inflation, and chase it down with rate hikes until they tame it/kill the recovery?
Powell says, no. He said this morning they will be “in no hurry until the economy is well into recovery … and really on solid footing before (even) starting to pull back.”
I suspect we will find this position of the Fed to be a necessity. The Fed fears deflation far more than it fears inflation. To best ensure a return to normalcy and an escape from deflation and depression, they will let the economy run and let inflation run hot. That has gold on the move again today (up over 3%).