Jim Rickards Warns "QT1 Will Lead To QE4"

Authored by James Rickards via The Daily Reckoning,

There are only three members of the Board of Governors who matter: Janet Yellen, Stan Fischer and Lael Brainard. There is only one Regional Reserve Bank President who matters: Bill Dudley of New York. Yellen, Fischer, Brainard and Dudley are the “Big Four.”

They are the only ones worth listening to. They call the shots. The don’t like dots. Everything else is noise.

Here’s the model the Big Four actually use:

1. Raise rates 0.25% every March, June, September and December until rates reach 3.0% in late 2019.


2. Take a “pause” on rate hikes if one of three pause factors apply: disorderly asset price declines, jobs growth below 75,000 per month, or persistent disinflation.


3. Put balance sheet normalization on auto-pilot and let it run “on background.” Don’t use it as a policy tool.


What does this model tell us about a rate hike in December?

Disinflation has been strong and persistent. The Fed’s main metric for this (core PCE deflator year-over-year) has dropped from 1.9% in January to 1.4% in July. The August reading comes out on September 29. This time series is moving strongly in the wrong direction from the Fed’s perspective. This is what caused the September “pause” (which we predicted for readers last March).

After seven months of decline, one month of increase, if it comes, will not be enough to get the Fed to end the pause. It would take at least two months of increases to change the Fed’s mind.

That’s unlikely given the impact of Hurricanes Harvey and Irma. Those effects may be temporary, but they come at exactly the time when the Fed was looking for a turnaround in core inflation. They won’t get it. The pause goes on.

How do I know this?

For one thing, the Fed explains this all the time. It’s just that the media won’t listen; they’re too busy chasing dots.

But this was also explained to me in detail by the ultimate Fed insider. I call him, “The Man Without a Face,” and I identify him by name in chapter six of my New York Times bestseller, The Road to Ruin.

It’s true that Stan Fischer is leaving the board soon, but the White House has been in no hurry to fill vacancies. The Big Four will still be The Big Three (Yellen, Dudley and Brainard) when the December meeting rolls around and the analysis will be the same.

Eventually the markets will figure this out. Right now, markets are giving a 70% chance of a rate hike in December based on CME Fed Funds futures. That rate will drop to below 20% by Dec. 13 when the FOMC meets again with a press conference. (There’s another meeting on Nov. 1, but no one expects any policy changes then).

Now, with respect to quantitative tightening (QT), the same way they tapered QE, they’re going to “taper” QT. This time however, they’re going to taper upward. Meaning they’re going to go from $10 billion a month not being rolled over to $20 billion, $30 billion, etc.

Eventually, the amount of securities they don’t roll over will go up until the balance sheet controlled by the Fed comes down to the targeted figure. The projection is that it could take five years to achieve. The problem is we might not make it that far before the entire system collapses.

We’re in a new reality. But the Fed doesn’t realize it.

Here’s what the Fed wants you to believe…

The Fed wants you to think that QT will not have any impact.


Fed leadership speaks in code and has a word for this which you’ll hear called “background.”


The Fed wants this to run on background. Think of running on background like someone using a computer to access email while downloading something on background.

This is complete nonsense. They’ve spent eight years saying that quantitative easing was stimulative. Now they want the public to believe that a change to quantitative tightening is not going to slow the economy.

They continue to push that conditions are sustainable when printing money, but when they make money disappear, it will not have any impact. This approach falls down on its face — and it will have a big impact.

Markets continue to not be fully discounted because they don’t have enough information. Contradictions coming from the Fed’s happy talk wants us to believe that QT is not a contractionary policy, but it is.

My estimate is that every $500 billion of quantitative tightening could be equivalent to one .25 basis point rate hike. The Fed is about to embark on a policy to let the balance sheet run down.

The plan is to reduce the balance sheet $30 billion in the fourth quarter of 2017, then increase the quarterly tempo by an additional $30 billion per quarter until hitting a level of $150 billion per quarter by October 1, 2018.

Under that estimate, the balance sheet reduction would be about $600 billion by the end of 2018, and another $600 billion by the end of 2019.

That would be the equivalent of half a .25 basis point rate hike in each of the next two years in addition to any actual rate hikes.

While they might attempt to say that this method is just going to “run on background,” don’t believe it.

The decision by the Fed to not purchase new bonds will be just as detrimental to the growth of the economy as raising interest rates.

The Fed’s QT policy that aims to tighten monetary conditions, reduce the money supply and increase interest rates will cause the economy to hit a wall, if it hasn’t already.

The economy is slowing. Even without any action, retail sales, real incomes, auto sales and even labor force participation are all declining. Every important economic indicator shows that the U.S. economy is slowing right now. When you add in QT, we may very well be in a recession very soon.

Because they’re getting ready for a potential recession where they’ll have to cut rates yet again. Then it’s back to QE. You could call that QE4 or QE1 part 2. The Fed has essentially trapped itself into a state of perpetual manipulation.

The problem continues to be that the stock market is overpriced for this combination of higher rates and slower growth.

The one thing to know about bubbles is they last longer than you think and they pop when you least expect it. Under such conditions, it’s usually when the last guy throws in the towel that the bubble pops. We’re not there yet.

Is this thing ready to pop? Absolutely, and QT could be just the thing to do it.

I would say the market is fundamentally set up for a fall. When you throw in the fact that the Fed continues to have no idea what they’re doing, and has taken a dangerous course anyway, I expect a very severe stock market correction coming sooner than later.

As market perceptions catch up with reality, the dollar will sink, the euro and gold will rally, and interest rates will resume their long downward slide.

Do you have your gold yet?


wisehiney Thu, 09/21/2017 - 22:20 Permalink

Assuming the world does not end on Saturday.My backup plan is to beat you guys to the precious store with that beautiful, old, souped up, dump truck.With immaculate timing.When this absoulutely correct shit happens.

CatsPaw Fidel Sarcastro Fri, 09/22/2017 - 04:25 Permalink

Depends on what your definition of "right" is.They have been able to predict a lot of small moves that were of no consequence and one big move that had huge consequence.Questions is: If you think they are wrong, who do you think is right? It is very easy to say someone is wrong, its much harder to be able to say what is right.I mean... you trust the fed? Trump? Mainstream Media? Pick your poison.

In reply to by Fidel Sarcastro

Rapunzal Five Star Fri, 09/22/2017 - 07:17 Permalink

The FED is not dumb, they know exactly what they are doing. When the market starts to crash and they catch it then that was their goal. If they let it crash and another Great Depression is on our hands, it was their goal.

The FED is the link between all elements of the NWO, the MIC, the intelligence services and the corrupt political system. They are controlling everything.

There are 2 agendas very important to the global bankers. Depopulation and the NWO.

The depopulation is very successful. Wars, vets doing suicide or pumped up with meds. Opioid crises in the flyover states. Etc. the slow death is the most convenient for the bankers.

My guess is they will not let it crash, cause the only fail they didn't calculate was the gun control. Obamas main goals, selling the bailouts to the people, Obamacare and gun control.

We gonna see how it will end, but one thing is for sure. The American elite will sell out the American people at the global stage.

In reply to by Five Star

philipat wisehiney Thu, 09/21/2017 - 22:38 Permalink

Agree with Rickards for once. There has been a perfect correlation between the S&P and the Fed Balance Sheet so why would that change now?I think it also important that all the major financial players, including Goldman and JPM are on record as saying that equities are over-valued. They always do this before a correction/crash so that they can point back and say "well, we did predict this"..

In reply to by wisehiney

ebworthen Thu, 09/21/2017 - 22:21 Permalink

Alchemist Yellen and her FED acolytes: "Funny money ad-infinitum!  Never mind reality, we're going to live forever!"Meanwhile, main-street getting crushed and discontent among the 95%+ growing.You might want to shave those beards Yellen and company; makes for quicker rope and guillotine work.

rp2016 Thu, 09/21/2017 - 22:39 Permalink

THe FED has made a terrible mistake or crime - socio-economic climate change. They always think like Gods.... this is not a mistake .. this is derangement...Jim, what are you willing to do? Do you have the courage to do that? I am only giving you the chance so that you don't tell me that I didn't ask you.

pizdowitz Thu, 09/21/2017 - 22:40 Permalink

Rickards, SHTFU and retire for god's sake. And take Warren Buffet with you, pleeeeze....Gold is not money. It is a metal. Just like copper and nickel.

gm_general Thu, 09/21/2017 - 23:01 Permalink

Everyone seems to ass-u-me that the Fed's goal is giggles and rainbows all the time, well its NOT. It was created to jack things up AND down by artificial amounts so that their masters can make even more money by playing both sides. And what better reason could there be to let things fall apart than to stomp on Trump and the anti-globalism trend? Just when its in hell in a handbasket time, they will swoop in with a plan to "fix" it with more globalist nonsense.

USofAzzDownWeGo Thu, 09/21/2017 - 23:07 Permalink

Wait a frikkin second here....... the fed is clueless? You believe the fed is going to let the market melt down when it's their biggest weapon to date? After that 08 crash, they completely took over 100% of the markets. How can you not tell? And how on earth can you believe they're gonna lose this? Don't think so, they are terrified of letting the market drop a milimeter!!! 

Iconoclast421 Thu, 09/21/2017 - 23:52 Permalink

For each and every quarter over the next year I am 100% certain that total global central bank balance sheets will continue to rise, and perhaps even actually accelerate. What the Fed does doesnt mean jack until global central bank balance sheets start to normalize, which will probably never happen.

Flankspeed60 Fri, 09/22/2017 - 00:25 Permalink

So, doesn't the FED own a boatload of equities, and isn't 'QT' just another phrasing for unloading them while they're still hugely over-priced? Or am I missing something?

Batman11 Fri, 09/22/2017 - 03:57 Permalink

Greenspan goes kamikaze.The FED seemed to expect rate rises to have an immediate effect and stepped the rates up to normalise them as the housing market began to over-heat (2005 approx.).There were delays while the teaser rate mortgages reset; the new mortgage repayments became unpayable; the defaults and other losses accumulated within the system until everything came crashing down in 2008.The FED had tightened much too fast by not appreciating the delays in the system.Everyone should be worried, these people are idiots.Greenspan goes kamikaze.http://newsimg.bbc.co.uk/media/images/45089000/gif/_45089770_us_rates_oct08_226gr.gifHe clears off before everything blows up.With evidence that Central Bankers go on suicide missions and then bail out to save themselves.Is the independent Central Bank really a good idea?

Batman11 Batman11 Fri, 09/22/2017 - 04:10 Permalink

The Central Banks haven’t purged the system of all the unproductive lending from the boom so they can’t raise rates much.US:https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.pngUK:https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.53.09.pngAfter making a right pig’s ear of it last time, the Central Banks have learnt from experience how not to do it.They now have a better idea of the delays involved.One global financial catastrophe is enough.Though Yellen might be suicidal.

In reply to by Batman11

Batman11 Batman11 Fri, 09/22/2017 - 05:21 Permalink

I know it’s probably deliberate.If you take the conspiracy theory approach, you get dismissed as a conspiracy theorist.If you take the ridicule approach they have two options:1) No, I am not an idiot, I deliberately took down the global financial system2) Yes, I am an idiot.Either way, they’re toast.

In reply to by Batman11

Last of the Mi… Fri, 09/22/2017 - 06:53 Permalink

Inflation is the heat of the economic engine. You have to actually have an economic engine and it has to be getting luke warm to even consider the effects of inflation like what the Fed is talking about here. Massive increases in salaries and prices to pay off nullify the QE that has been done to the economy over the past 8 years. Guess what, it ain't happening guys, all you have done is provided the biggest income divide in history which in turn has brought on the most insane PC wave since the French revolution. No economic engine equals the bubble popping of your own QE asset bubbles. The only possible solution is more QE to maintain the "status quo". That is why there will be no QE taper and why the economy will never "kick off" The Fed's circle of friends are holding the economy down while it prints more money. Again and again and again. I'm not even going to mention the definition of insanity here.

GreatUncle Fri, 09/22/2017 - 06:58 Permalink

When they pumped in all that QE the economy adapted to it all growth was based upon it.Now pull it out you have the contraction a recession.People just neede to wake the fuck up ... how good you feel takes wealth and CB induced as is how shit you feel when they contract the economy.THE FUTURE COMING RECESSION IS CREATED BY THE CENTRAL BANK MANIPULATIONS NOT YOU! Hold them accountable for it. 

Econogeek Fri, 09/22/2017 - 13:09 Permalink

I think the Fed governors know we're in the first stages of a liquidity trap, and outright (if not measured) deflation.  Interest rates are going down.  The Fed must/must pin the short end, and the $.gov bond market seems clearly to understand the deflation issue, so why bet on the curve steepening, even short-term?I think one possible reason the Fed is happy-talking about QT being a background non-event is they want to test the strength of the underlying deflation.  Seems like many think the markets won't want to absorb the Tsys and agencies and the junk the Fed will be peddling.  But -- some Fed reasoning may go -- if bond buyers really are convinced about deflation, buy buy buy they will, at least the higher-rated stuff.  All the Fed has to do is keep the front end pinned down hard, and see what happens.  In other words, the .gov bond bubble isn't a reach for yield or a risk-off trade per se, it's a statement about deflation.I don't think we're there yet, but if the Fed loses control of the front end, I think 10s and 30s will soar, their rates will collapse.  I think the obvious purchase is gold.