Anthony Pompliano is chairman and chief executive of the financial services firm ProCap Financial and chief executive of the investment firm Professional Capital Management.
Last week, the Federal Reserve cut its benchmark interest rate by 25 basis points, bringing the federal funds rate down to a targeted range of 3.5 to 3.75 percent. That was expected. The big surprise out of the two-day meeting was the Fed’s announcement that it would start to expand its balance sheet again, purchasing $40 billion in Treasury bills each month.
Say hello to our old friend “quantitative easing.” In 2008, then-Fed Chair Ben Bernanke assured Americans that QE was a temporary tool for navigating what was an extraordinary crisis. Yet the Fed’s balance sheet remains far bigger than it was then.
Now comes current Fed Chair Jerome H. Powell suggesting that bigger is better again. The timing is strange. Stocks, home prices, gold, the money supply and national debt are all at record highs. So why, in such an overheated environment, is the central bank easing monetary policy?
The reason is that multiple deflationary forces loom: Artificial intelligence and robotics are automating away inefficiencies. Tariffs are reshaping trade. And a surge in deportations is tightening labor markets. Each would be worth watching on its own, but collectively they create perfect conditions for the Fed to fail at monetary policy.
So what does this mean for investors?
Historically, when the Fed buys bonds, it pushes bond yields down and encourages investors to move into riskier assets in search of higher returns. Stock prices rise because future earnings are discounted at lower rates. This makes companies appear more valuable. Digital assets like bitcoin benefit because investors look for investments that outperform cash when the money supply expands. Real estate prices increase because mortgages become cheaper and investors chase hard assets. Long-duration assets, such as tech stocks, growth companies and venture-backed businesses, often rise the most since their value is dependent on future cash flows, which become more attractive when rates fall.
Conversely, one of the biggest losers during QE is likely to be the U.S. dollar. Traditional value stocks, commodities tied to economic stress, and defensive sectors may also lag because quantitative easing shifts investor appetite away from safety and toward growth and speculation.
But the broader question isn’t whether QE works; we know it boosts asset prices and stimulates GDP growth. The bigger question is whether it works for most Americans. While Wall Street cheers, ordinary people may see little benefit beyond temporary market optimism. Remember, about half of the country has no investment assets, so they are more likely to watch their savings melt away as the dollar is debased.
This is the challenge of modern central banking: managing a delicate balance among markets, money and the real-world economic health of the American family — which once again seems to come last.
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