By Craig Wilson
This post Quantitative Tightening: Four Things We Learned from the Fed in July appeared first on Daily Reckoning.
The Federal Reserve has now signaled that it is embarking on a quantitative tightening (QT) program for the American financial system. After mounting fears over a $4.5 trillion-dollar balance sheet and what it could mean for the economic future, the central bank has finally decided to act.
The Fed set out on a groundbreaking policy to raise rates for the third time in six months in June, but what happened in July could have an even greater impact.
As a primer to the new age of QT and Fed “normalization,” here’s the four major things that we learned in July:
The Fed is a Threat to the Dollar
As of July 24, the U.S dollar index is down 8 percent on the year. In the current market, the U.S dollar has fallen to a 13-month low. Against the euro, the dollar has hit 2.5 year lows.
The expectation is that it will continue to fall further in a selloff that was bolstered after the Fed decided to maintain its current policy rate.
Even Barron’s got in on the action running the headline, “The Dollar Gets Closer to Falling off a Cliff.”
While there are many factors to such a downturn pushing toward the cliff, the Fed is by far one of the biggest. The lack of action on tax reform and a stimulus package that is virtually non-existent continues to weigh heavily on confidence to the dollar.
As more rate hike uncertainty floods investor thinking, the dollar may continue to come under threat. It is true that political noise plays into the equation, but the sweeping impact that the Fed continues to press on the dollar outweighs any negative uproar from political pressures.
Gold is the Real Winner from July
The struggling dollar has a history of bolstering the market price of gold. The looming quantitative tightening program could further a gold rally that seems to be underway.
Gold has hit seven week highs. The growth in gold comes after questions continue over economic data and uncertainty from the Fed on where it might be headed with rates.
Speaking to Reuters, Commerzbank analyst Eugen Weinberg noted that, “Dollar weakness is driving the gold price. It’s not just against the euro, it’s against most major currencies.”
Confirming the uncertainty from the Fed and legislators the analyst said, “U.S politics is a mess and U.S data has not been inspiring.”
For quantitative tightening policy measures, strengthening in gold will likely show economic data that encourages the Fed to act. Although QT policy will be gradual, the uptrend in gold shows that there are concerns amongst investors that believe the policy could be more disruptive than markets have prepared for.
Economist Jim Rickards first reported on The Daily Reckoning in May that he saw great potential for gold in the second half of the year.
Rickards’ remarked that he expects …read more
Source:: Daily Reckoning feed
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