1. US Economy Off to Slower Than Expected Start in the 1Q
2. Will Disappointing GDP Growth Head-Off a Fed Rate Hike?
3. The Fed/Central Banks’ $13 Trillion Gorilla in the Room
4. Unwinding Monster Balance Sheets Will be Difficult at Best

Overview

The US Federal Reserve, the European Central Bank and the Bank of Japan alone have over $13 trillion in quantitative easing assets on their balance sheets. The Fed recently hinted that it would like to start reducing its QE assets this year if possible. That has sparked an entirely new discussion on how the central banks could go about reducing their unprecedented QE asset holdings without sparking a new financial crisis.

This is a complicated issue and one that, if not handled properly, could be a disaster for the stock and bond markets in the years ahead. We’ll start today with a basic look at the problem, how it developed and some of the possible solutions.

Before we get into that, let’s take a look at last Friday’s very disappointing GDP report for the 1Q. In light of that weak report, some are asking if the Fed will hold off on raising interest rates again this year. I’ll give you my thoughts as we go along.

US Economy Off to Slower Than Expected Start in the 1Q

Americans say they feel more optimistic about the economy since President Trump was elected. But they certainly are not acting that way in terms of consumer spending, and that is shaping up to be a challenge for the Trump administration. The caution among consumers was particularly notable on big purchases like automobiles and durable goods.

Economic growth slowed in the first quarter to its slowest pace in three years as sluggish consumer spending offset impressive business investment. The Commerce Department reported on Friday that 1Q Gross Domestic rose only 0.7% (annual rate) in the first three months of this year. That was only one-third of the 2.1% pace in the 4Q of last year, and was well below the pre-report consensus of a 1.1% gain.

GDP Tumbles

Some economists downplayed the weak showing in the 1Q noting that the Commerce Department frequently understates growth in the 1Q due to seasonal adjustments. They point out that growth in the first three months of each year has averaged only 1% since 2000, which is less than half the average for the other three quarters of the year over the same period.

Others warned that the disappointing GDP estimate for the 1Q is a sign of a real slowdown in the economy. They pointed to the fact that consumer spending, which accounts for apprx. 70% of GDP, rose an anemic 0.3% in the 1Q versus a better than expected jump of 3.5% in the 4Q. Others noted the very weak March employment report showing only 98,000 new jobs as compared to the monthly average of 180,000 for all of 2016.