The Goldilocks Economy Story The Fed Is Pitching Has Holes In It That Will Be Filled With Gold
Prior to the Fed’s Powell doing his latest press conference earlier today, the USD index and gold were trading like he would reiterate the Goldilocks pitch he gave at the last Fed meeting. Which is exactly what he did. This Goldilocks nonsense is about public relations trying to get people to believe their narrative, not economics.
If the jobs market and economy is just right, then why did they cut rates by a half-point? A half-point cut is an emergency action, not one done if everything is fine, regardless of the spin doctoring.
The jobs market is the best forecaster of what is happening in the economy and the picture is not good. Full-time jobs are in decline, part-time jobs are increasing as are government jobs. The government is trying to prop up the jobs numbers but everybody knows government jobs are a drain on the economy.
Powell can speak with a forked tongue but the Fed’s actions are speaking much louder than their words.
Another factor that not many are talking about is why did the Fed have to stop decreasing their balance sheet before they went into a rate cutting cycle? There just aren’t enough buyers to take their positions off them.
If the economy goes into a hard landing, or even a soft landing for that matter, the Fed will have to increase their balance sheet. It is alarming that when the Fed increased interest rates to fight the inflation they helped create, they said they were going to normalize their balance sheet.
Their balance sheet got to around $9 trillion and then they couldn’t even get it below $7 trillion. Now that they are cutting again, and the supply of debt is unprecedented, the Fed will have to increase their balance sheet. How is that for normalization?
We’ve seen this movie before, cutting rates and increasing the balance sheet is bearish for the US dollar and extremely bullish for gold.
The Goldilocks narrative won’t last for long. The jobs market is in trouble which means the economy is as well. The Fed will likely have to do a few half-point cuts, then a series of quart-point cuts to keep the soft landing narrative alive and avoid a hard landing.
When the Fed pitched the Goldilocks narrative at their September meeting, it only took a few hours for gold to figure out something isn’t adding up.
I've been looking at the USD index chart and thinking it looks like it is on a ledge ready for a big drop. It doesn’t look like it can be propped up for much longer.
When the USD drops, gold will head higher. The long-term trend for gold has never been better while the USD looks to have troubled waters ahead as the Fed has just started its rate cutting cycle and will get more bearish when the Fed has to increase its balance sheet.
Every day the economic world is looking more golden.
All the best,
Allan Barry Laboucan
