Ground control to President Powell

Ground Check to President Powell – Countdown Start, Engines On – Countdown Start, Engines On – Check Ignition And God’s Love Be With You David Bowie

A smooth countdown to the start of the Federal Reserve’s $ 120 billion monthly spending cut has begun. The Federal Reserve began to dramatically inject liquidity and money into the capital markets from 2020. The initial effect was to temper or slow down the rate at which the recession spread and transformed. into a technique used to aid in the economic recovery that was a result of the economic hardships caused by the recession.

This dramatic action by the Federal Reserve has only happened twice in history. The first time the Federal Reserve used quantitative easing to alleviate a deep financial crisis was in 2009. This recession was the result of a banking crisis and resulted in a deep depression. During this period, gross domestic product contracted at the fastest rate in 50 years and, at the same time, the economy was losing hundreds of thousands of jobs every month. This program began after the Federal Reserve had already cut interest rates to near zero. However, this action was not enough to temper the expansion of the recession, let alone foster economic recovery. From 2008 to 2015, the Federal Reserve began to accumulate massive amounts of assets that it added to its balance sheet.

Before initiating this new technique called “Quantitative Easing”, the Federal Reserve’s balance sheet stood at around 900 billion dollars. Over the next seven years, from 2008 to 2015, the Fed would continue to accumulate assets, pushing its balance sheet from less than $ 1 trillion to $ 4.5 trillion. This process took place in four distinct stages called QE1 to QE4. Members of the Federal Reserve argued that this unconventional monetary policy was a major element that saved the United States from a crisis worse than the Great Depression.

However, this program was not free of cost. CNBC reported that “the Fed’s low interest rate policy has made it inexpensive for the government to continue to borrow and spend. US public debt is around $ 20 trillion and some fear the bubble will burst as the Fed pulls out of the government market. This untested experimental monetary policy was first unwound by slashing or cutting monthly asset purchases, followed by asset reductions, as the Fed would let billions of dollars in securities mature each month and not would not reinvest them. They took the $ 4.5 trillion balance sheet and shrunk it to $ 3.7 trillion before deciding that another cut would hurt the economy.

So what does quantitative easing have to do with tomorrow’s jobs report

In 2020, the Federal Reserve relaunched for the second time in history this monetary policy of massive asset purchases, as it did to temper the 2008 recession and contribute to an economic recovery. Starting with a balance sheet of just under $ 4 trillion in just under two years, they inflated their balance sheet of assets to $ 8.4 trillion. While the Fed had acknowledged that at some point it would begin to normalize its extremely accommodative monetary policy, there was no concrete timeline. The Federal Reserve maintained it will unwind this process when data confirms the economy is recovering and the workforce returns to peak employment. In President Powell’s most recent speech, which took place at a press conference following the last FOMC meeting, he said the discussion to start the reduction has started and they will begin to roll out. the “soon” process.

More recent comments from President Powell and other members of the Fed have suggested that the reduction could begin as early as November, October or December if the data continues to support job growth.

It is for this reason that so much attention will be paid to the report on tomorrow’s employment published by the Ministry of Labor. Forecasts from economists polled range from tomorrow’s figures indicating 400,000 to 500,000 more jobs will be added in September. However, analysts’ predictions have been really hit and miss. For example, the forecast for the number of jobs added in August was about 700,000 new people added to the payroll, and the actual numbers came in and 243,000 lukewarm new jobs. July 2020 undoubtedly had the biggest job increase reported at just under a million and this report is way above expectations.

This month’s September jobs report is critical because it will give the Federal Reserve the information it needs to make a concrete decision on when to start shrinking.

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Wishing you, as always, good exchanges and good health,