The Whole World is Now Waiting on the Fed
The Federal Reserve meets tomorrow and Wednesday of this week.
According to the latest predictive data, there is only a 32% chance that the Fed will cut rates at this meeting…
However, the data also says there is a 67% chance the Fed will cut rates in July…
As well as a 55% chance the Fed will cut rates again in September…
And another rate cut sometime between September and year-end.
In other words, the markets are forecasting the Fed will cut rates THREE times this year.
If this proves to be the case, it will represent one of the most rapid U-turns in Fed policy in history.
That’s because this time last year, the Fed was about to RAISE rates for the second time in 2018.
The Fed would also go on to rate rates another TWO times that year – for FOUR rate hikes total.
The Fed was ALSO shrinking its balance sheet at a pace of $50 billion per month, or $600 billion per year at the same time.
Why is that important? Every $200 billion in balance sheet reduction was the equivalent of a rate hike.
So the Fed would technically do the equivalent of SEVEN rate hikes in 2018 (four actual hikes and three “hikes” via its balance sheet reduction).
Put simply, the Fed is going to go from raising rates seven times… to CUTTING rates THREE times… in the span of 12 months.
What could prompt such a crazy series of events?
The Fed now realizes that it has burst the Everything Bubble.
How Our Current Financial System is Structured
Before we move any further, we need to first understand how the Fed got here.
As I explained in my bestselling book The Everything Bubble: The Endgame For Central Bank Policy, when then-President Richard Nixon ended the gold standard on August 15, 1971… the U.S. dollar was completely severed from its link to gold.
Up until this point, gold had been the de facto backstop for the financial system.
So when the gold standard was broken, it raised the question: What would be the new backstop for the financial system?
The answer? Debt. Specifically U.S. government debt, or Treasuries.
From this period onward, the U.S. government would pay its debts solely in U.S. dollars – dollars that the Fed could print at any time.
Of course, as a result the U.S. government has never formally defaulted on its debts.
This in turn established Treasuries as the only real “risk free” investment on the planet – with the yields on these bonds representing the “risk free” rate of return against which every other asset class would be valued.
So starting in the early ‘70s, Treasuries became the bedrock of the financial system.
This is why when the Fed later chose to create a bubble in these bonds after the 2008 Crisis, EVERYTHING got bubbly (hence my coining the term, The Everything Bubble).
What Truly Terrifies the Fed… and Why It Panicked in Late 2018
With this in mind, the one thing that would truly panic the Fed today is if the yields on Treasuries began to spike.
Which they did in mid-2018, rising above their long-term downtrend.
The chart below illustrates this point.
This is what forced the Fed to panic in late 2018 and change course from implementing SEVEN rate hikes in a single year to talking about cutting rates THREE times a year later…
The Fed is desperate to get bond yields back into their long-term downtrend.
And if you take a second look at the chart above, you can see that it appears to be working…
Bond yields have rolled over and are on the verge of moving back into their down-trending channel.
This is the BIG STORY for the financial system today, which is why the next few Fed meetings are SUPER important.
If the Fed cannot successfully “patch over” the Everything Bubble by getting bond yields back into a downtrend, the U.S. will enter a debt crisis.
Here at Money & Crisis, we’ll be monitoring this closely.
I’ve already shown investors one way of playing this trend – an investment that’s already up over 5% in the last two weeks…
I’m now preparing for an even more aggressive strategy to profit from the Fed’s policy screw-up…
I’ll tell you all about it in the coming weeks, but the initial results are some of the best I’ve ever seen in my 15-year career.