Economy
If you thought that the monetary policy of the Federal Reserve and other central banks today seems similar to the response to the 2008 financial crisis, you’d be right. Central banks have always been one-trick ponies; the only way they know of responding to any crisis is by creating more money. Whether it’s through open market operations to manipulate interest rates, or outright purchases of assets through quantitative easing, central banks over the long term increase the money supply, but have never decreased it.
The Fed’s current conduct of monetary policy is no different, and Fed Chairman Jay Powell has committed the Fed to maintaining easy monetary policy “as long as it takes.” What does that mean for the economy, and for the health and well-being of your investments?
Let’s recap what the Fed has done so far this year and how this compares to what it did in 2008.
Just like in 2008, the Fed has pushed its target federal funds rate down to the zero lower bound. The Fed tried to normalize interest rates after nearly a decade at zero, but at the first sign of difficulty the Fed began to reverse itself, and as soon as the economy began to turn south due to lockdowns, the Fed dropped interest rates to zero.
By dropping interest rates so early in the cycle, the Fed painted itself into a corner, leaving itself unable to use interest rate policy to maneuver through financial difficulties. This is the same thing that happened to the Fed in 2008, as interest rates were quickly cut to zero, to no effect. In 2008 that forced the Fed to resort to quantitative easing in order to stimulate the economy and today, with interest rates once again at zero, QE is one of the only ways the Fed can now try to engage in monetary policy.
Quantitative easing has gotten a bad rap, so the Fed tries to avoid the use of the term. Instead, it will refer to asset purchases, accommodative monetary policy, or increasing its holdings of Treasury securities and agency mortgage-backed securities. These all mean the same thing: the Fed will create money out of thin air to buy assets, including newly issued debt.
In 2008, the Fed began its first round of QE late in the year. And over the next five years, the Fed added over $3 trillion to its balance sheet, bringing it to more than five times the size of its pre-crisis balance sheet. While the Fed began a half-hearted “normalization” of its balance sheet, bringing it back below $4 trillion, it expanded rapidly once again with the onset of COVID.
With the federal government spending trillions of dollars that it didn’t have in its COVID stimulus bill, the Fed stepped in to monetize all of that newly issued Treasury debt. And with Congress poised to potentially spend trillions more in the coming months on COVID relief, the Fed will likely be gearing up to unleash a monetary tsunami of further QE.
The Fed’s first forays into propping up markets during this crisis occurred in late 2019, as overnight repo markets showed tremendous signs of weakness. At one point the Fed pledged up to $5.5 trillion in liquidity to prop up those markets, so dire was the situation. In fact, it was far more than the Fed did in 2008. While the Fed did target relief to specific firms or industries in 2008, much of that took place through its credit facilities, and the size and scope of its support remained relatively limited compared to what it’s prepared to do today.
One of the more interesting and undereported Fed actions this year was its decision to drop reserve requirements to zero. Normally the Fed sets reserve requirements at anywhere from 0-10%, with only very small banks being allowed to get away with not having any required reserves. But effective March 26, the Federal Reserve lowered reserve requirements to zero for all depository institutions in the US. For those who understand how the money multiplier works, that means that banks now can produce essentially unlimited amounts of loans and deposits.
Not even in 2008 did the Fed get that aggressive. Now that banks have had a taste of zero reserve requirements, will the Fed ever be able to put that genie back in the bottle? Banks that have decided to use that leverage may not be able to get back to normal if reserve requirements are ever put back in place again.
The Fed’s credit facilities were one of the primary methods it provided liquidity to markets during the 2008 crisis. At the time, it was a revolutionary use of the Fed’s emergency lending powers. But today it has become so ho-hum that the Fed decided to start up new credit facilities to lend directly to municipalities and households. While some of those facilities have been wound done by the outgoing Trump administration, don’t be surprised to see the Biden administration reauthorize those programs.
With the promise to keep monetary policy as accommodative as possible as long as possible, Chairman Powell has essentially promised an era of ultra-easing. Any problem the economy faces will be met with a flood of newly created money. That should make Wall Street happy as free, cheap money continues to boost stock markets.
But over the long run, all that newly created money will drive down the value of the dollar, harming savers and investors and eroding the real returns many investors make. For retirees and those on fixed incomes, that continued devaluation of the dollar will be especially painful, making it increasingly difficult for them to make ends meet.
Fortunately, there are ways you can protect your investments against the deterioration of the dollar, increasing inflation, and monetary mismanagement. Among the best protections is an investment in gold, which has maintained its value and purchasing power over centuries. In fact, in recent decades gold has even outperformed stock markets, more than doubling the performance of stocks since 2001.
If you’re nearing retirement and looking to protect your assets against dollar devaluation, maybe you should consider an investment in gold. You can even roll over or transfer existing retirement assets from a 401(k), IRA, TSP, or similar retirement account into a gold IRA. That allows you the ability to invest in physical gold coins or bars while still enjoying the same tax advantages as your current retirement accounts.
If you’re keeping tabs on what the Fed is doing, and you’re worried about the effect trillions of dollars of new money flooding markets will do to the value of your savings, shouldn’t you think about investing in gold today? Contact the experts at Goldco and learn more about how gold can protect your investments against the consequences of the Fed’s easy monetary policy.
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