Regular readers of our post are familiar with our dislike of the Federal Reserve and their policies in general. Their “mandates” from Congress of shepherding the economy into full employment with inflation stability and being lender of last resort sound good on paper. But first of all, even on paper when did their “mandate” include accruing a $9 trillion balance sheet? When did the mandate include protecting Wall Street from market cleansing selloffs in stock and bond prices? The obvious answer to those questions is the mandates never included the sort of size, power and control over the world’s economy that the Fed has taken on…
But more importantly, we would submit that the Fed is not necessarily comprised of nefarious and/or incompetent actors. Our opinion is that free market economies cannot be managed by small all-powerful groups – and such attempts are doomed to eventually fail. There should not be one group of Fed governors dictating to the world the most important price in the entire global economy – the interest rate on the U.S. dollar. There should not be one small group determining how many trillions of dollars of assets should be bought to support asset markets during times of duress. Our economy, monetary and fiscal policies are a LONG way away from the free- market utopias many of us dream of. So far away that the term “free market” is a strange misnomer of the world that we live in…
So now the Federal Reserve has backed itself into a corner. They conjured so many currency units out of thin air during the Covid debacle that now inflation is running hotter than it has in four decades. On top of that, supply chain issues, international political turmoil and short-sighted government policies attempting to correct previous short-sighted government policies have all contributed to an economic backdrop that is not sustainable. Yet the Fed continues to push interest rates higher because of the stubborn inflation numbers – take a look…
So, if the Fed is going to stick to its target of 2% inflation and the tools it is going to use to get there remain raising short term interest rates and reducing the size of their balance sheet, then we clearly have a way to go…
Our thoughts are that the Fed will, sooner or later, have to admit that they don’t have control of the supply side of the world economy and that they will have to accept a higher rate of inflation. They will likely come out in the financial press and reset their inflation target at maybe 3 or 4% rather than the existing aim. Of course, we have no insight clue as to the timing of such an announcement. The Fed may wait until they break something in the financial realm in the US or they may announce this in short order. When they do the asset markets will likely rocket higher as that will effectively be an announcement that interest rate hikes will slow down. As it is now, the Fed is scheduled to raise rates at their March meeting and the marketplace is anticipating a hike of 25 basis points with a 25% chance that it will be a 50 basis point hike. That will remain a weight on asset markets which had a very bad week last week. Where stocks go is still very dependent on the Federal Reserve so stay tuned.
Regards and good investing!
Greyson Geiler