SPECIAL REPORT: An 'Uncertain' Fed Slows Quantitative Tightening | Axel Merk
Mar 20, 2025
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Axel Merk, a seasoned money manager and Fed expert, shares his insights on the Federal Reserve's latest decisions regarding monetary policy. He dissects the implications of the Fed slowing down quantitative tightening amidst rising inflation forecasts. Merk critiques the Fed's historical confidence and discusses potential recession risks. The conversation dives into the recent surge in gold prices and its marketplace dynamics while highlighting the investment potential and risks in the evolving financial landscape.
The Federal Reserve is maintaining its policy rate while slowing quantitative tightening to address persistent inflation amid economic uncertainties.
A shift in focus towards fiscal policy is evident, with substantial government spending abroad influencing U.S. economic conditions more than the Fed's actions.
Market reactions post-announcement indicate cautious optimism among investors, though concerns persist about a potential recession and systemic risks.
Deep dives
Federal Reserve's Stance on Rates
The Federal Reserve has chosen to maintain its main policy rate between four and a quarter and four and a half percent, reflecting a cautious approach amid economic uncertainty. A notable development is the decision to reduce the pace of quantitative tightening, signaling a shift in their strategy regarding U.S. Treasuries while keeping the pace of mortgage-backed security roll-offs unchanged. This decision is interpreted as a response to a slowing economy, as the Fed acknowledges persistent inflation and an increased unemployment forecast. While minor adjustments were made to economic growth predictions, the overall message indicates a reluctance to adopt a more dovish stance, which some view as indicative of stagflationary trends.
Inflation and Economic Uncertainty
The Federal Reserve's acknowledgment of higher inflation forecasts, alongside a reduction in economic growth expectations, underscores the challenges faced in the current economic climate. The conversation highlights a level of uncertainty around tariffs and policies influenced by previous administrations, suggesting a reactive rather than proactive approach from the Fed. Fed Chair Jerome Powell has downplayed concerns of a repeat of the economic conditions from the 1970s, despite apparent similarities in inflation trends. This divergence in perspectives raises questions about the Fed's confidence in navigating these issues, as well as the potential risks posed by a stagnant economic environment.
Fiscal vs. Monetary Policy
The discussion emphasizes the growing relevance of fiscal policy in comparison to monetary measures, highlighting how substantial government spending can overshadow the Fed's impact. The focus is drawn to an expected trillion-euro spending initiative in Germany, contrasting with the U.S. facing fiscal contraction. This distinction suggests that while the Fed aims to control inflation and stabilize the economy, external factors, particularly fiscal policies abroad, may exert greater influence on U.S. economic conditions. The mention of executive actions potentially impacting trade balances further complicates the fiscal landscape, necessitating careful consideration of how these policies interconnect with broader market dynamics.
Market Reactions and Gold Prices
Recent market reactions following the Fed's announcements indicate a cautious optimism among investors, with the S&P showing positive trends in the immediate aftermath. However, concerns linger about the potential for a recession sparked by a slowing economy and the implications of tariffs on growth. The rising price of gold is interpreted as a signal of market wariness regarding economic stability, where increased demand for gold suggests a shift toward risk-off strategies among investors. Furthermore, the resilience of gold as an asset class might reflect a broader anxiety about systemic risks that could arise from deteriorating confidence in monetary systems.
Uncertainties in Financial Markets
The conversation delves into the complexities surrounding the interplay of fiscal and monetary policies, emphasizing the need for clear and effective communication from the Fed. Concerns about the potential for a significant market disruption are raised, particularly if executive actions disrupt long-standing financial flows or trade balances. As uncertainty reigns in the economic environment, the Fed's apparent confidence may mask deeper issues that could lead to unforeseen consequences. The overarching sentiment is that while the Fed currently appears to be on autopilot, the dynamics of market confidence and economic health are precariously poised, underscoring the pressing need for a strategic policy framework.
An hour ago, the Federal Reserve Open Market Committee released the outcome of its meeting this week, keeping its policy rate unchanged (as expected) but slowing the pace of its Quantitative Tightening program.And just a little while ago, Fed Chair Jerome Powell just wrapped up his press conference related to this release. The market’s reaction (so far) has been positive.My bullet-point notes to Powell’s conference are below.And I’m also happy to announce that Fed-watcher Axel Merk is joining us again to deliver his expert reaction to the Fed’s latest guidance as well as take your questions live.
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