Jerome Powell's Unprecedented Policy Shift Raises Alarms as Economic Discrepancies Deepen
There is an unsettling discrepancy in the messages coming from Jerome Powell and his associates at the Federal Reserve in the past six weeks, raising suspicions about the current economic situation. Jim Quinn from The Burning Platform draws parallels to September 2019 when the repo market exposed underlying issues in the financial system, foreshadowing a significant financial crisis. Powell responded by initiating quantitative easing (QE), and the subsequent COVID pandemic provided an opportunity for massive monetary injections to sustain the system.
Despite an ostensibly robust economic backdrop with GDP accelerating at 5.2%, low unemployment, and thriving corporate profits, Powell, who had previously raised rates to 5.3%, suddenly signals a shift. In a surprising turn, he and other Fed officials now hint at imminent rate cuts, contrary to their earlier tough stance on maintaining rates until inflation reaches their 2% target.
The timeline since November 1st reflects this inconsistency:
- Nov. 1: Powell mentions that achieving 2% inflation "has a long way to go."
- Nov. 21: No indication of rate cuts at the last meeting.
- Dec. 1: Talks about rate cuts are deemed "premature."
- Dec. 1: Powell asserts they are prepared to tighten policy further if needed.
- Dec. 13: Powell predicts rates have peaked, forecasting three rate cuts in 2024.
- Dec. 15: The Fed "isn't really talking about rate cuts."
This abrupt change in rhetoric coincides with the stock market reaching all-time highs and interest rates plummeting, creating an unusual scenario considering the economic challenges faced by a significant portion of the population.
Speculation arises about Powell and the Fed anticipating a looming crisis or detecting issues within the financial system. Reports indicate that Too Big To Trust Wall Street banks are burdened with nearly $700 billion in unrealized losses due to soaring interest rates. These banks have increasingly relied on the Fed's emergency facilities, raising concerns about potential vulnerabilities.
The article suggests that an emergency, whether a global crisis, natural disaster, or war, could trigger a run on the banks, turning unrealized losses into realized ones and triggering a collapse of the entire financial system. The Fed's urgency to drive interest rates lower is questioned, with the possibility that Powell aims to eliminate unrealized losses before they become a reality.
However, the article acknowledges that lowering interest rates significantly could reignite inflation, emphasizing the challenging position in which Powell and the Fed find themselves. The piece ends by speculating whether we are heading towards another banking crisis in March, with potential issues related to the expiration of certain programs and the draining of reserves, leading to deposit flight.