The Fed’s Been Compromised – Buy Cryptos

Written by Jason Simpkins
Posted June 21, 2019

The U.S. unemployment rate is 3.6%.

That’s the lowest it’s been since 1969.

GDP is growing consistently over 2% per year.

And inflation is fully contained, checking in at 2%, which is the Federal Reserve’s self-appointed target.

Why then is the central bank signaling a rate cut?

About half of Fed policymakers expect to lower the central bank’s key short-term rate by as much as half a percentage point this year. And the first cut could come as soon as July.

Again, why?

The Fed has what’s called a “dual mandate.” It’s to "promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates."

Well, as I just mentioned, employment is at its maximum level, prices are stable, and interest rates (currently 2.25%-2.5%) are certainly moderate.

So what’s the impetus?

Especially when the stock market just careened past another all-time high.

Wharton professor of finance Jeremy Siegel has an answer. Siegel says the Fed should cut rates to bolster President Trump...

“Right now projections are Q2 growth is 1.5%. That would be the slowest during the Trump presidency,” he told CNBC. “If the tariff clouds continue to gather in the second half of the year, we may barely reach 2%. Short term, it’s going to be hard to make big gains with the trade clouds and the interest rate clouds hanging over the market.”

Evercore economists Krishna Guha and Ernie Tedeschi agree.

“We now see a base case in which the Fed will reluctantly cut rates three times starting in September in a mini-easing cycle intended to insure against downside risks associated with trade conflict,” the analysts wrote. “Absent an improvement in trade, failure to validate market pricing would trigger a further tightening of financial conditions.”

And that, more or less, seems to be the consensus. Analysts seem to believe that the Fed will cut interest rates to compensate for the economic damage of President Trump’s trade policies.

Unsurprisingly, Donald Trump does too. And he’s not shy about petitioning Federal Reserve Chairman Jerome Powell to do exactly that.

When the stock market plunged in October, Trump said Powell "almost looks like he's happy" to be raising interest rates.

"Every time we do something great, he raises the interest rates," he said. "I'm paying interest at a high rate because of our Fed."

Trump Fed Tweet

And now that the market’s rebounded, Trump says the Fed should cut rates because communist China doesn’t have a free market.

"They devalue their currency. They have for years,” he said. “It's put them at a tremendous competitive advantage, and we don't have that advantage because we have a Fed that doesn't lower interest rates.”

Trump then added: "We should be entitled to have a fair playing field, but even without a fair playing field — because our Fed is very, very destructive to us — even without a fair playing field we are winning."

One might also ask here, if we’re winning, why do we need a rate cut? But this is a sentiment that defies logic.

President Trump — who appointed four of the Fed's five board members, including Chairman Powell — also lamented: "We have people on the Fed that really weren't, you know, they're not my people."

He’s also threatened to fire Powell entirely, prompting the Fed Chairman to declare: “The law is clear that I have a four-year term. And I fully intend to serve it.”

Trump’s made other efforts to influence the central bank, as well.

In the spring, he tried to appoint two unqualified lackeys — Stephen Moore and Herman Cain — to the Federal Reserve Board.

That blatant attempt to manipulate monetary policy came undone when Moore’s comments supporting child labor and demeaning women surfaced and Cain withdrew because he was afraid of a background check.

Now, he’s pushing a new dovish addition to the board — Judy Shelton, who wants to cut interest rates to zero.

“I would lower rates as fast, as efficiently, as expeditiously as possible,” Shelton said. “Because I’m so against paying interest on excess reserves, in a way, I’m radically in favor of eliminating 235 basis points.”

Perfect.

The bottom line is this: There is nothing in the Fed’s mandate (quoted above) that suggests the central bank’s job is to compensate for bad economic policies, stock market dives, trade wars, or the president’s displeasure.

The Fed’s job is to promote employment and contain inflation. And by those measures, current monetary policy is perfectly adequate.

I’ll go even further to say that nothing good can come from cutting rates at this point.

Savings rates are already terribly low, and cutting rates will punish savers even further. Meanwhile, those looking to borrow could gain some relief, but not much.

Just consider that a quarter-point interest rate reduction on a $30,000 home equity line of credit would only reduce the monthly payment by $6.25. Two such cuts would trim the bill by $12.50. A quarter-point cut on a $5,000 credit card balance would lower the minimum payment by just $1 a month.

And then, what does the Fed do if the economy slips into a recession anyway and there are no actions left to take?

President Trump believes the United States should devalue the dollar in an effort to keep pace with China. But the reality is that if the U.S. dollar is ever as weak as the renminbi, it will mean something terrible has occurred in the global economy.

And it could reach that point.

Because while he’s been whining about interest rates, President Trump has rolled up trillions of dollars in debt.

His tax cuts alone added $1.5 trillion to the national debt. Thanks to that cut, the U.S. Treasury saw a 31% drop in corporate tax revenues last year. That’s almost twice the decline official budget forecasters had predicted. Receipts were projected to rebound sharply this year, but so far they’ve only continued to fall and are down by almost 9%, or $11 billion.

The Treasury Department also now says that the federal deficit will exceed $1 trillion this year, an increase from $779 billion last year.

So ultimately, Trump may get his wish. The value of the U.S. dollar may plunge uncontrollably.

And that’s why it’s a good idea for investors to diversify into other assets like gold and cryptocurrencies.

If you haven’t done that yet, Nick Hodge just released a new report that details a huge profit opportunity in cryptos that lets investors buy in for less than $1.00.

You can find out more about that here.

Fight on,

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Jason Simpkins

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Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of The Wealth Warrior, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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