Gold New High, Stealth QE?


Gold has just reached a new record high. Everyone is excited about interest rate cuts, but how much do they matter? Does the Fed have a stealth money printing scheme in the works?

Gold reached a historic milestone on Thursday, surpassing the US$2,200 threshold for the first time. This was due to the recent actions of the Fed. While keeping rates steady, they maintained expectations for potential cuts of 75 basis points throughout the year. The FOMC’s outlook included the possibility of up to three 25 basis point cuts before the year concludes, a bullish indication for gold as it doesn't offer interest returns.

In trading for June delivery, gold surged by US$24.10, settling at a remarkable US $2,206.50 per ounce. This surge surpassed the previous record set on March 11 at US$2,188.50.

In the bond market, Treasury yields also climbed. The U.S. two-year note yielded 4.638%, marking a 2.7 basis point increase, while the 10-year note's yield rose by 0.2 basis points to 4.278%.

Stealth QE

Does the Fed really need to focus on cuts, or do they have another stealth way of increasing the money supply? The short answer is that they have a range of weapons they can deploy outside of cuts:
 

Lowering Leverage Requirements: The Federal Reserve does have the authority to adjust leverage limits for banks. Leverage limits refer to regulations that restrict the amount of debt a bank can take on relative to its capital reserves. By changing the limits, the Federal Reserve can allow banks to create much more money than they would have before. This is almost exactly the same as lowering interest rates. This could be the weapon of choice for the Fed if they want to make it look like they are fighting inflation while actually making it worse.

Encouraging Riskier Lending: Another strategy could involve adjusting leverage limits based on the riskiness of assets. They could lower leverage requirements for loans to small businesses or for mortgages to encourage banks to extend more credit in these areas. This targeted approach can help direct credit to sectors of the economy that are in need of funding and promote economic growth.

Temporary Waivers or Exemptions: During times of financial stress or economic downturns, the Federal Reserve may temporarily waive or relax leverage limits to provide banks with additional flexibility to support the economy. These temporary measures can help mitigate credit crunches and ensure that banks continue to lend during challenging times, thereby preventing a further contraction in the money supply.

 

Monitoring and Supervision: The Federal Reserve can also use its supervisory authority to closely monitor banks' leverage levels and intervene when necessary to ensure they are aligned with monetary policy objectives. By conducting regular stress tests and risk assessments, the Federal Reserve can identify banks that may be overleveraged or engaging in risky lending practices and take appropriate corrective actions.

While everyone is keeping an eye on interest rates and seeing them as the kingmaker (or breaker), it may be worth looking out for these changes to the banking sector which could be just as powerful.