Skip past the menu Skip to accessibility controls

No Way Out: Jerome Powell Admits Return to ZIRP and QE Are Inevitable

Alexander Trigaux, Editor, GoldSilver 
JUN 5, 2019

A funny thing happened on the way to my finalizing this article: Federal Reserve Chairman Jerome Powell finally broke down and told the truth:

"The trade comments opened remarks that set a somber tone about the dilemma the Fed faces. With interest rates and inflation mired at such low levels, Powell said, future downturns are likely to force the central bank to again cut rates to zero and resort to "unconventional" tools like bond buying to support the economy. 

"There will be a next time," Powell said in opening a two-day conference devoted to a discussion of whether to try to jolt inflation and interest rates higher, or plan for more massive rounds of asset purchases. 

Interest rates so close to zero "has become the preeminent monetary policy challenge of our time," Powell said. "Perhaps it is time to retire the term 'unconventional' when referring to tools that were used in the crisis. We know that tools like these are likely to be needed in some form" in the future."

It was a remarkable moment of candor for any Fed Chair, let alone one whose public statements have sharply diverged from his actual policy decisions. Of course, Mike Maloney has forecast this for years: Inevitably, central banks print currency rather than allowing free market economies to feel the downside pain that follow market bubbles. It’s what they do.

Prior to Powell’s statement, I was writing a piece on how the market was calling the Fed’s bluff, indicating via the Fed futures market an expectation that rates would be cut twice in 2019, despite zero indication from the Fed that they were considering such cuts:

After spending all of 2018 talking up the US economy and the need to normalize rates again, December’s market swoon was all it took for him to act in direct contradiction to his own statements by pausing the Fed’s rate-hike campaign.

Now, with his incredible admission that the Fed is trapped in an echo chamber of its own past policy mistakes, we’re staring down the barrel of a new reality with so few options we need to change the very language of finance to accommodate it.

Why should we believe what Powell says now when he’s proven so unreliable in the past? Because, like so many Washington D.C. functionaries before him, he now realizes that his options were largely preordained by the self-serving choices of those that came before him.

The juggernaut of the federal debt and the asphyxiating lack of Fed policy options have moved in lock step with each other over the course of many decades. Each new administration, each new Fed chair, thinks they’ll be able to right the ship. They all discover it’s too difficult, it’s too late. So like chess players not yet in checkmate but strategically doomed, they simply play out the few moves still available to them.

Which get fewer and fewer all the time. For 39 years, Fed chairs have been raising rates to combat inflation, then cutting them to spur growth. But with the ocean of debt issued in the wake of those rate-cut periods, the ongoing ability to raise rates down the road has been nearly choked out entirely:

US Effective Federal Funds Rate, 1980-2019

If zero percent interest rates and massive rounds of currency-printing to buy assets is no longer considered ‘unconventional’, Powell is admitting he has no choice but to follow in the steps of Europe, which is following in the steps of Japan:

Bank of Japan, Short-Term Interest Rate Target, 1980-2019

Japan, which has been mired in 20 years of economic malaise and 0% interest rates. Japan, whose government has engaged in so much free-market-destroying QE that it now owns 80% of all publicly traded Japanese ETF shares.

None of these economies wanted to resort to such desperate measures, to end up where they’ve ended up. But ZIRP and perpetual QE are eventually the only options left when you’ve been reckless with your currency.

The saving grace for gold and silver investors is that the US only dilutes its currency because it can. When the US dollar is inevitably printed into oblivion by the last feckless politician in a long line of weak-willed baton passers, we’ll still have the same fixed supply of gold and silver we’ve had for billions of years. Only citizens the world over will see it for the real money it has always been.

Once the world’s reserve currency is exposed as one of the longest cons on record, expect gold and silver to be valued accordingly.  We don’t know if the damn breaks or just leaks slowly. Either way, following Japan means that our currency will decay and that gold and silver will rise. At this stage in the game, in all scenarios, gold and silver win.