The Only Thing That Matters Update

Yesterday (Wednesday) the Fed did address the two things I was calling attention to. Of course, the reduction of a 1/4 point in interest rates was already baked in. However, it was the second that seems to have suddenly given Wall Street some angst, which was: a halting of the runoff regarding its balance sheet. Yet, not until December 1st, and more critically, no indication the Fed will restart any QE, of any type, and any time soon.

Wall Street has been particularly concerned with not just the current liquidity levels, but more importantly: just when, not if, the Fed will return to QE. Yes, you read that right, Wall Street is now actively signalling the Fed has to go back to money printing and fast or, it all falls apart. Just as I’ve been arguing would be the case.

For those that might not really get the implications, let me address it this way…

The Fed has reduced its balance sheet by a little over $2Trillion. Sounds great as a discussion point, not so much if you fully comprehend the true exposure. Why?

That still leaves a ballooned balance of over $6Trillion, and is exactly where it was when they said they were going to reduce it last time, before they had to inflate it again.

In other words – You are here, again.

The Fed is restrained from reducing its balance sheet further for fear of what exactly? Are the “markets” not at the highest in human history? Are not monetary conditions for further run off the most optimal today with a tad bit of inflation over what the Fed shoots for ? (e.g., ~4% vs 2% target) Would not a bit more selling or run off be warranted to bring that down further, especially with a rate cute? Unless…

It’s all a mirage and the plumbing can not continue to flow without more QE. Or said differently: Unless the Fed turns the money printers back on “Brrrrrrr” the facade falls apart. Just as I keep arguing to ever-the-more deaf ears.

Today, I believe, it’s now simply a coin flip as to whether or not things make it to the December 1st timeline the Fed feels confident in reaching. From my perspective: Without the Fed reasserting itself like it has prior (aka going back to doing everything they said they no longer need to) Christmas might not turn out like most are currently surmising.

As always, we shall see.

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