Over the past month, we’ve talked about some pro-liquidity clues dropped by the FOMC Vice Chair, John Williams. 

In early November, he signaled to markets that the Fed would be prepared to expand the balance sheet again to avert any 2019-like liquidity shock.

Remember, in this 2019 analogue, the Fed made three consecutive quarter point rate cuts, and returned to expanding the balance sheet to respond to “strains in the money markets” (i.e. tightening liquidity conditions). 

Stocks did this …

   

As the former Fed Chair, Ben Bernanke once said, QE tends to make stocks go up.

Fast forward to today, and the Fed just made a third consecutive quarter point cut.  And right on cue, they returned to expanding the balance sheet again — to the tune of $40 billion a month (a “big” amount, in Powell’s own words).

Just like in 2019, the Fed is playing the semantics game — the asset purchases are “not QE” but “reserve management.” 

So, what’s going on?    

As we discussed earlier this year, in my March 24th note, the Fed had just dialed down the rate at which it was shrinking its balance sheet (quantitative tightening) from $25 billion to just $5 billion a month.  That was a sharp reduction, to a small amount, which meant they have effectively ended QT. 

Something was up. 

And once again, it was attributed to stress in money markets: “signs of increased tightness in money markets.”

This was the first clue that something in the financial plumbing was, again, breaking, and a Fed response is coming (including QE).

Here we are, nine months later, and the Fed is back to aggressively expanding the balance sheet again.

With that, as we’ve discussed many times in this daily note over the years: we’ve yet to see an example of a successful exit from QE (anywhere). 

Until proven otherwise, it’s Hotel California — “you can check out, but you can never leave.”

Perhaps the most important takeaway from today’s press conference was Powell’s admission on the “secular ongoing growth of the balance sheet.” 

He explicitly said, maintaining constant reserves, “calls for us to increase about $20-$25 billion dollars per month.”

Did the Fed Chair just admit the U.S. economy now requires the Fed to print $250-$300 billion a year, forever, just to tread water? 

That’s what he said.  And they’re going to ramp that number even higher over the coming months, just to be safe.  

So, the liquidity hose is now officially back on.

Powell also noted that rates are no longer “restrictive” but within the range of “neutral.” The headwind is gone (at least in the Fed consensus view).

Combine all of this with the fiscal side — with Trump floating $2,000 checks in the mail — and you have a massive green light for asset prices.

Finally, we have the geopolitical kicker.

The EU is stepping closer to monetizing frozen Russian assets.  This effectively breaks the seal on sovereign asset confiscation.

With that, we have this confluence of monetary debasement and global confiscation/distrust.  That’s a formula for much higher hard asset prices (particularly gold).