Well, the Federal Reserve just raised rates once again. This is something which so many stated without a doubt could never happen without the whole system imploding. But it is in fact happening and the Fed has even now rolled out their plan to reduce the amount of Treasury bonds and mortgage backed securities which they hold on the books while increasing rates even further within this calendar year.
This normalization of monetary policy and reversing of QE is something which we have been predicting here on POM since the beginning of 2014. This prediction of course went against almost all others who predicted doom and gloom.
The first Federal Funds rate hike happened in December of 2015. This was the first increase in almost a decade. The rate moved from the 0% – 0.25% range to 0.25% – 0.50%. This was followed in December of 2016 with another increase to the range between 0.50% – 0.75%.
A few months later in March of 2017 the Fed increased again to 0.75% – 1.00%. Now in June the rate increased for the fourth time 18 months to 1.00% – 1.25%. With each increase the doom and gloomers yelled that the system could take no more increases. Each increase was a step closer to destruction. Some even claimed that QE could never be stopped or even reversed. We conveniently forget about all of these horrible predictions.
The truth is we all make bad predictions from time to time. I made one a few years back that gold was going lower. It did for awhile and than recovered again. I still believe that it will go sub-$1000 once the Chinese renminbi reaches a level of internationalization which will force it to sever the exchange rate arrangement it still maintains with the USD.
But these end of the world predictions were so wrong about everything that it’s a wonder anyone even listens or reads the material of those who made them.
Of course there will be some volatility and some companies and banks may not make it as the system rebalances and monetary policy is normalized so it can be aligned with the multilateral framework. Even some average people who are over-leveraged may lose their shirts. But such situations will in no shape or form reflect the type of devastation which has been predicted for so long.
Additionally, this will not kill the dollar. The dollar is not going to die. The dollar will be around for a longtime to come after its powerful reserve status has been reduced. Just like the British pound still exists now almost a century after it lost its exorbitant privilege.
It is more likely that the rate increases and normalization of policy will strengthen the dollar to the point were it will be having a negative effect on the international monetary system and other nations. China will use this as the pretext to end the fixed rate band it maintains with the dollar.
The Trump administration have already made it clear that they don’t want a strong a dollar. As such, a strengthening dollar could provide the perfect pretext for the Treasury to make sudden and dramatic changes to the dollars exchange rate arrangements. Negotiating new trade deals will be a part of this process.
It should now be very clear to longtime POM readers that the thesis presented here for the last 4 years is almost spot on, with only minor fluctuations in timing and tweaking. Such huge and foundational changes to the worlds monetary and financial systems do not happen over night. It takes time and patience with minor adjustments made to account for real world changes. But the trend is clear.
More rate changes will come. Bond reduction and the reversing of all the QE that took place will continue. There will always be those who push the doom scenario for what ever reason that encourages them to do so. Every time there is a drop in the market or something goes negative the chorus will get loud and exclaim the end is near. – JC
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JC Collins can be contacted at email@example.com