PLEASE LISTEN! The FED Is About To Destroy the Economy - Lawrence Lepard
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After running the balance sheet up from 4 trillion dollars to 8.9 trillion dollars during the COVID-era quantitative easing campaign, the Fed has been employing quantitative tightening since 2022 to decrease the size of its balance sheet and lower the total amount of bank reserves within the system. Despite this lack of stress, the Fed is slowing down its Q.T. significantly. Starting last month, the Fed is lowering the runoff from 60 billion dollars per month down to 25 billion dollars per month. As of June 26, the Fed’s assets stand at 7.2 trillion dollars.
Lawrence Lepard, Managing Partner of Equity Management Associates, thinks that the balance sheet will go from 7 trillion dollars to 20 trillion dollars and inflation will go higher. He believes that we're in a decade like the '70s where we have waves of higher and higher inflation."
U.S. inflation was unchanged at 3.3% in May, according to the U.S. Bureau of Labor Statistics. Federal Reserve Chair Jerome Powell says the U.S. is back on a disinflationary path. The U.S. inflation projections for 2024 suggest it will be closer to 2% later this year. Interest rates aren’t expected to fall until there’s more confidence in falling inflation. Markets are currently pricing in two interest rate cuts before the end of 2024.
Speaking in a panel discussion at the European Central Bank’s monetary policy conference in Sintra, Portugal, Powell said Fed officials still want to see annual price growth slow further toward their 2% target before they would feel confident of having fully defeated high inflation. “We just want to understand that the levels that we’re seeing are a true reading of underlying inflation,” he added.
According to Lawrence Lepard, even though the market is saying not to expect interest rate cuts until later in the year or perhaps next year, he bets the Fed's going to surprise us. He believes they need to cut interest rates in order to try and reduce the U.S. Federal interest expense.
The most recent projections from the Congressional Budget Office (CBO) confirm once again that America’s fiscal outlook is on an unsustainable path — increasingly driven by higher interest costs. A week before this past Thursday’s presidential debate, the Congressional Budget Office updated its projections for U.S. debt and deficits. The CBO’s new estimate for the fiscal 2024 deficit is now 1.9 trillion dollars, up from its prior view of 1.6 trillion dollars issued in February and up from the 2023 deficit of about 1.7 trillion dollars. According to the CBO, federal debt held by the public will be 122% of GDP in 2034. Economic growth will slow to 2% in 2024 this year and 1.8% in 2026 and later years.
According to Lawrence Lepard, if we have a downturn similar to the '08 crisis or the dot-com downturn, the deficit in the United States is going to go from 2 trillion dollars to 4 trillion dollars instantly. If they add additional programs the way they did during COVID, that 4 trillion dollars could become 6 trillion dollars.
The election and its aftermath could be catalysts. Amid a Wall Street Journal report that said Trump’s allies have drawn up plans to erode the Fed’s independence, an election victory could raise concerns the Fed will monetize U.S. debt by buying more Treasuries and stoking inflation.
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