It seems that the Federal Reserve has modified their monetary policy in regards to their current program of quantitative normalization. Beginning in 2015, the Fed ended their quantitative easing policy which flooded the market with almost interest-free capital as the Fed’s balance sheet swelled to just over $4.5 trillion. They began to take the necessary steps to reverse the steps that were taken following the 2008 banking crisis.
First, they began to liquidate their massive accumulation of assets. Secondly, the Fed implemented small interest rate hikes taking the Fed’s funds rate from almost zero to 2% - 2.25%. There have been a total of eight rate hikes, with three of them occurring this year.
The Fed has also stated that there is a high probability that they will implement one more rate hike in December.
As reported by Reuters, “The U.S. faces only moderate financial risks despite elevated asset prices and concern over the possible impact of rising corporate debt, U.S. Fed chairman Jerome Powell said on Wednesday as the central bank released a broad overview of the health of credit markets and the financial system.”
Chairman Powell’s statements followed the release of a report that is the first of what the Fed intends to be a twice a year endeavor. These reports will detail the economic climate, to maintain and grow the transparency of their actions.
The dovish stance as conveyed by the chairman resulted in a major rally in U.S. equities, a weakening U.S. dollar, and stronger gold prices.
But Wait, There’s More
Now trader’s attention will be focused on the upcoming G20 meeting which will begin on Friday. This meeting is extremely significant in that the presidents of both the United States and China are planning a face-to-face meeting.
The trade dispute has morphed into a full-blown trade war at this point, with tariffs already initiated and running from both countries. However, President Trump has stated that if they don’t make some significant headways, he will implement tariffs on the remaining $270 billion worth of Chinese imports, as well as letting the current tariffs which are at 10% ratchet up to 25% on January 1.
Although the issues are too complex to be resolved in a single face-to-face meeting, words of encouragement, as well as the laying of groundwork to resolve our trade issues on a long-term basis, would be considered an extremely successful meeting.
Wishing as always, good trading,