Many commentators are baffled as to why the Fed has suddenly reversed course. Throughout 2017 the Fed has talked repeatedly about raising rates several times as well as shrinking its balance sheet.
Then in the span of a single month, the Fed just about dropped all of this. Fed Chair Janet Yellen, speaking to Congress, confessed that the Fed is just about done with rate hikes and that any balance sheet reduction will NOT be used to drain liquidity from the system.
What happened to cause this change?
The bond market went into revolt with yields on the 10-Year Treasury breaking out of a major downtrend.
Why does this matter?
Globally the world has tacked on some $68 TRILLION in debt since 2007. All of this has been issued based on the assumption that interest rates would remain LOW.
Put simply, if 2007 marked a large debt bubble, today’s bubble is significantly larger with global Debt to GDP now at 327%. In this context, any rise in bond yields (meaning bond prices are falling) represents a systemic threat.
On top of this, there are over $368 TRILLION in derivatives that trade based on interest rates. Over $100 trillion of these are on US bank balance sheets.
Which is why the Fed has completely given up on hiking rates and is going to let inflation continue to percolate in asset classes.
This is going to send Gold and other inflation hedges THROUGH THE ROOF.
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Chief Market Strategist
Phoenix Capital Research