The Fed To The Rescue?
As to whether the Fed can rescue the economy, it has certainly come to the market’s rescue via its messaging, and thus, cuts are already priced in, even though they are not officially guaranteed. In terms of the economy, the real question is whether the Fed inflicted too much damage last year with its four rate hikes, coupled with the $50 billion-a-month unwinding of its balance sheet, known as Quantitative Tightening (QT). Escalation of trade tensions fueled uncertainty with GDP growth poised to continue waning, albeit at a slow pace. Should the economy falter further than expected, it’s unlikely, with rates already trending lower, that the Fed has enough firepower to staunch a deeper slide.
Perhaps the president’s April tweets calling for the Fed to lower rates by 1.0 percent and to begin buying bonds are a sign of things to come. “We have the potential to go up like a rocket if we did some lowering of rates, like one point, and some quantitative easing,” he wrote. Is this how the Fed, ultimately, would come to the rescue if economic growth stalls? Let us hope the Fed doesn’t need to revert to 2009 monetary policies to jump-start the economy but be prepared should that unfold as the ultimate scenario.
Quincy Krosby is the chief market strategist at Prudential Financial.