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The Fed Isn’t the Only Game in Town: The ECB Takes a Decidedly Dovish Turn

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All eyes will focus on the Federal Reserve as it wraps up its June meeting. But it’s important to remember the Fed isn’t the only game in town. Moves by the European Central Bank also have a significant impact on the global economy (and the gold market) and it has taken a decidedly dovish turn.

Most analysts expect the Fed to hold interest rates steady in June, but potentially set the stage for a July rate cut. (Although Jim Grant said he thinks the Fed will actually cut this month.)

In some way, Federal Reserve Chairman Jerome Powell is backed into a corner. On the one hand, any hint that a rate cut is off the table would likely tank already shaky stock markets. The markets have been juiced for weeks in anticipation of more easy money heroin. On the other hand, an excessively dovish tone or a June rate cut could lead to accusations that Powell is caving into pressure put on by President Donald Trump.

As the FOMC meeting kicked off, reports that Trump looked into the legality of demoting Powell surfaced. The president has repeatedly cirticized the Fed chair. In a recent ABC interview, Trump said that even though Powell was his pick, he “disagrees with him entirely.” He said that if it weren’t for the Fed, we’d have even stronger GDP growth.

Frankly, if we had a different person in the Federal Reserve that wouldn’t have raised interest rates so much, we would have been at least a point and a half higher. I’m not happy with what he’s done.”

While the Fed’s next moves are up in the air, the European Central Bank has gone full-dove. European stocks shot up to a six-week high after ECB President Mario Draghi hinted at new rate cuts or even another round of quantitative easing during a speech Monday.

The ECB had already taken a more dovish turn during its June meeting. The ECB announced its easy-money exit strategy just one year ago and ended quantitative easing just last December. But after its June meeting, the bank put any rate hikes on hold indefinitely, saying it “expect them to remain at their present levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.”

This was the ECB equivalent of the “Powell Pause.” And Draghi indicated there was already talk about a pivot back to an easy-money policy.

Several members raised the possibility of further rate cuts. Other members raised the possibility of restarting the asset purchase program or further extensions in the forward guidance.”

Draghi’s most recent remarks reinforce the sense that we may well see more “crisis era” monetary policy in the Eurozone – and sooner rather than later.  ECB Vice President Luis de Guindos expanded on Draghi’s comments, saying the ECB could initiate another large bond-purchase program.

We have a wide range of instruments available: We have forward guidance, we have TLTRO (targeted longer-term refinancing operations), we have the reinvestment of the maturities of our balance sheets — so there is an ample, you know, range of instruments that we could use, and QE is part of them.”

So much for normalization.

The ECB’s QE purchases totaled somewhere in the neighborhood of  2.6 trillion euros. The bank also pushed interest rates below zero. So, what did the EU get for all this stimulus? Not a whole lot. As CNBC put it, “The recent dovish approach by the central bank suggests that may be too early to remove all the support to the economy and, more importantly, that further interventions are likely required.”

If at first you don’t succeed…

The bottom line is it appears increasingly likely that “normalization” is over, not just in the US, but across the pond.

And we’re nowhere near normal.

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About The Author

Michael Maharrey is the managing editor of the SchiffGold blog, and the host of the Friday Gold Wrap Podcast and It's Your Dime interview series.
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