Economist John Williams warns the Federal Reserve has painted itself into a very tight no-win corner.
No matter what the Fed does with rates it’s going to be a disaster. Williams explains, “You had some very heavy selling towards the end of the year and when you saw the big declines in the stock market you also saw that accompanied by a falling dollar and rising gold prices.”
That was foreign capital which was significant fleeing our markets. So if the Fed continues to raise interest rates, and they want to do and they still don’t have rates where they want them, it’s going to intensify the economic downturn. That’s going to hit the stock market. If they stop raising rates . . . and they have to go back to some sort of quantitative easing, that’s going to hit the dollar hard. Foreign investors are going to say the dollar is going to get weaker and let’s get out of the dollar. Then, you are going to see heavy selling in the stock market.
So either way they go, they created a conundrum for themselves because of the way they bailed out the banking system (in 2008-2009). At this point they don’t have an easy way out of this.
Williams says the U.S. is already entering into a recession. Williams contends,
The first quarter, which is the quarter we are in right now, the first quarter of 2019 likely will be in contraction partially due to the government shutdown. That is slowing the economy on top of the interest rate hikes, but the cause of the recession here is not the government shutdown. It’s the Fed hiking rates…
…the fundamental driving factor that was putting us into recession even before the government shutdown was the rapid rise in interest rates.