On Sept. 20, 2017, the Federal Open Market Committee announcement included an unusual statement in its next-to-last paragraph: “In October the Committee will initiate the balance sheet normalization process described in June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.”
In my NumismaticNews.net column on Sept. 28, 2017 (posted at https://www.numismaticnews.net/article/fed-cant-reach-normal), I discussed the background and the implications of this announcement.
Just what did that mean? Here is the shorter explanation I wrote in the Oct. 4, 2017, issue of Liberty’s Outlook (you can read the entire issue at https://libertycoinservice.com/wp-content/uploads/2017/10/libertys-outlook-newsletter-october-2017.pdf):
"As part of the tactics to manage the Great Recession, the Federal Reserve loaded up on Treasury debt and mortgages held by government sponsored entities such as Fannie Mae and Freddie Mac. The Fed’s assets soared from $900 billion before the Recession to $4.5 trillion. The Fed’s official position was that the assets would not be reduced until the economy was really recovering.
"So, this part of the FOMC announcement would make it appear that the Fed is really saying that the U.S. economy is improving. But that is a lie that the U.S. government wants the public to believe.
"If you read the attachment to the FOMC announcement, it states that the Fed’s assets will only be reduced by $10 billion per month. At that rate, it will take 30 years to reduce assets to pre-Great Recession levels.
"In financial circles that means two things: 1) it will never happen, and 2) it will never happen because the US economy is in much worse shape than the U.S. government and Federal Reserve are trying to get the public to believe."
After several years of a zero percent federal funds interest rate, the Fed began raising the interest rate in December 2015, claiming that the U.S. economy was finally recovering from the Great Recession of 2007-2009. The move to normalize (reduce) the Fed’s balance sheet was another supposed indicator of a recovering economy. However, even with all the supposed positive economic news over the past decade, the U.S. economy, in my judgment, was far from as strong as the politicians, bureaucrats, and many in the media were trying to assert.
After December 2015, the Federal Reserve implemented multiple increases in the federal funds interest rate. At the conclusion of its December 2018 meeting, it signaled that it was looking at multiple further interest rate increases in 2019.
But by the Fed meeting in late January 2019, it had capitulated on its plan for multiple increases in the federal funds interest rate this year. After last week’s meeting it signaled that, at most, there would only be one rate increase within the next two years.
After the Fed’s October 2017 announcement that it would reduce its balance sheet by $10 billion per month, it eventually raised the reduction to $60 billion monthly, another pretense that the U.S. economy was strong. Today, the Fed is reducing its balance sheet by $30 billion each month. In the announcement last week, the Fed stated it would cut the reductions to $15 billion per month in May, then cease further reductions in September 2019.
As this “normalization program” comes to a halt, the Fed’s balance sheet will have just under $4 trillion in assets. As I predicted in 2017, the Fed was never going to succeed at cutting its assets back to $900 billion. Now, just 17 months after stating it would do so, the Fed has capitulated and announced an end to this program.
In early February, Federal Reserve Bank of San Francisco President Mary Daly told reporters that the Fed was likely to resume quantitative easing (meaning inflation of the money supply) as a routine action rather than continuing its current policy and that this action should only be considered in an emergency.
When you couple her statement along with last week’s Fed announcement that it will end its program to normalize its balance sheet, you can read between the lines that the U.S. government is admitting that the U.S. economy is more precarious than being publicly stated. Further, the government is preparing to ramp up inflation of the money supply, which is guaranteed to knock down the purchasing power of the U.S. dollar.
In my mind, there is no clearer signal that it is time to acquire and hold some bullion-priced physical gold and silver as protection against the coming decline in the value of the U.S. dollar.
Patrick A. Heller was the American Numismatic Association 2018 Glenn Smedley Memorial Service Award, 2017 Exemplary Service Award, 2012 Harry Forman Dealer of the Year Award, and 2008 Presidential Award winner. He was also honored by the Numismatic Literary Guild in 2017 and 2016 for the Best Dealer-Published Magazine/Newspaper and for Best Radio Report. He is the communications officer of Liberty Coin Service in Lansing, Mich., and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Some of his radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).
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