Fed Starts To Panic in Effort To Avoid Panic ‘About Trade’

June 4, 2019 (EIRNS)—Three senior Federal Reserve officials on June 3-4 came forward with promises “to the markets” which seemed to point to a return to quantitative easing (QE) programs, including imminent, multiple discount rate cuts in the second half of 2019. While financial media are all blaming this on President Donald Trump’s tariffs and sanctions of the past month destabilizing financial markets, in fact the interest rates on long-term U.S. Treasury securities have been dropping steadily for six months, suddenly reversing a two-year rise. This is one of several clear recession signs.

On Monday, St. Louis Fed President James Bullard said “rate cuts may be warranted soon.” On Tuesday Federal Reserve System Chairman Jerome Powell, speaking at a Fed conference in Chicago, said the Fed was ready “to help sustain the recovery with whatever is necessary.” Powell said, clearly referring to a return to QE, “Perhaps it is time to retire the term ‘unconventional’ when referring to tools that were used in the crisis. We know that tools like these are likely to be needed in some form in the future.” Fed Vice-Chair Richard Clarida, at the same conference, gave an interview promising at least one early rate cut to CNBC, which reported “financial markets anticipate at least two interest rate cuts before the end of the year.” Only last December, the Fed was still raising rates.

U.S. factory orders, announced today, are up just 1.0% in the past year; industrial production is up only 0.8% in the same period; the so-called global average of industrial purchasing managers’ indices (i.e., surveys) is at zero growth. This is not to consider the farm economy; JPMorgan analyst Ann Duignan sent a note to investors on May 13, in the words of Drovers Greg Henderson, that “the fundamentals of [U.S.] agriculture are ‘rapidly deteriorating,’ ” and this is plain for all Americans to see.

But the Federal Reserve’s readiness to head back toward zero rates is extraordinary considering that in May the Fed itself made a report, and Powell a statement on it, about the growing danger of high-risk corporate debt, which it warned is at levels, relative to GDP, higher than immediately before the 2008 crash. An article in Forbes June 3 showed that the volume of leveraged loans in the U.S. economy has nearly tripled since 2007, while that of junk bonds (still the larger amount) has more than doubled. Between them, they are $4.5 trillion of $14 trillion U.S. non-financial corporate debt, with additional corporate debt steadily falling into these “junk debt” categories.

It is this bubble that the Federal Reserve is most concerned to “sustain” by now heading back toward QE.