Until last month, the Federal Reserve has been on a tightening strategy since late 2015. The Fed was decreasing the size of its balance sheet and the Fed Funds rate was increased from essentially zero to the 2.25%-2.5% range. The balance sheet of assets which is comprised of mostly mortgage backed securities and Treasuries, was decreased nearly $800 Billion from its peak in 2014…
Conventional wisdom maintains that during tough economic times the FED should increase the size of its balance sheet (buy securities to support market prices) and lower the interest rates. As the economy recovers, the FED should raise rates and let its balance sheet run off.
We have been very critical of the FED’s loose policies for many years. Before raising rates at the end of 2015, they had left short term rates at “emergency” levels for more than six years. Since then they have raised rates and reduced their balance sheet, but the damage had been done with skyrocketing debt levels. Now the world economy is showing significantly slower growth, yield curves are inverting, and trade wars are raging. So, is the FED going to loosen back up?
Well, on July 31st the FED lowered the Fed Funds Rate by .25%. They have also said that their previous intent to reduce their balance sheet would be stopped. The market is putting an 80% probability of another .25% lowering of rates in September – and the other 20% is that there will be a .50% rate cut. NO ONE expects rates to be raised or even stay the same. So, the answer is yes, the FED is loosening up.
Regards and good investing,