Hello all. I was curious what you all think of the current Federal Reserve monetary policy situation. I am looking at this subject without a political bias, because after all, the Fed is supposed to be apolitical and I think for the most part, they truly are. I was wondering if any of you have a problem with what the Federal Reserve is doing currently, which is standing on top of the brake pedal with both feet come hell or high water. The sharp reversal in monetary policy, not only this year, but also in 2020 at the onset of Covid, is troubling to me. Then we take into account what we saw this past week with the Bank of England. They had to do a complete 180 overnight to stop their currency from cratering. Going from a hawkish policy right back into bond purchases. My question is, are such quick reversals in monetary policy a reflection of our society wanting "instant gratification", etc? I'm disturbed by the Federal Reserve all but saying they are steering our economy into a recession. What I see and what many corporate CEOs, analysts and investors are seeing, is a BIG problem on our doorstep. Yes, the inflation problem needs to be corrected, but.. it was the Federal Reserve who stoked that bubble to begin with, with the quick reversals in monetary policy at the onset of Covid. Many believe the Fed overdid it and waited way too long to reverse course. Now they are reversing course so quickly, it's having a whiplash type of impact, where the economy will almost inevitably contract in a big way due to the scope of the ensuing liquidity crunch. Which is already underway, of course. It has more room to run and will get worse. Stocks are reacting, signaling lots of pain that lie ahead. It is difficult to believe with such a low unemployment rate that we could be headed for such a painful scenario, but everyone sees it coming. I think the Fed has really put us in a pickle with sharp reversals in course over the past 3 years. It seems they are desensitized. 1,000,000 job losses...if it stops inflation, so be it, seems to be their current line of thought.
Conventional wisdom is to raise interest rates above the rate of inflation, but the fed can’t (and won’t) take rates from near zero to 9+% overnight. So instead it’s death by a dozen increases that still haven’t brought interest rates to the rate of inflation and which don’t necessarily solve the problem today. But they are likely cratering the economy in the interim.
I agree, but their increases have been pretty steep this time around, compared to historical norms. Successive moves of .750% up in such a quick period of time don't have a lot of precedent in our history. Just makes me think they see it too. The disaster lurking. But they also waited entirely too long to reverse course, which just added to the problem.
That's because of their tampering over the past 20+ years. When you look at interest rates over the past 20 to 25 years, we have been way too low for way too long. Add QE during the Great Recession and really we are in unknown territory. Everything they are doing today is not resulting in the outcomes they expected. I just think those results are slower to act, so expect high unemployment in 2023. If you think 2022 has been bad, 2023 is eagerly waiting at the door to say, "Hold my beer!"
I’ve said it before. but the causes of this inflationary round are largely outside of the norm. While the last stimulus in particular was a bad idea, Russia, supply chains, labor disruptions due to the pandemic driving up salaries etc, the only way to stop the inflation train is to run the economy into a ditch and greatly lower demand on pretty much everything. When that happens, there will be more than one “expert” wondering if inflation was really the bigger risk.
They need to pause and see if the lagging indicators of inflation come down. I will say; however, that if you have a long term outlook the Fed is giving you an unbelievable buying opportunity. Inflation will collapse and a recession will result. The Fed will then cut and we will go into a 10-20 year negative real interest rate environment. Assets will skyrocket. Strap in and enjoy the next big bull.
I agree rates were likely held too low over the past 20 to 25 years, however, we were able to contain inflation during that period with relative ease. I believe it was the overcorrection at the onset of Covid, coupled with two years of aggressive quantitative easing..much of which was done after it was clear the economy was on a strong rebound, which caused most of the inflation we're seeing today. It's been talked about for years, but it's finally come to fruition. There was simply no need to pump for two years. Their current policy basically confirms this thought as they are hiking at unprecedented levels.
But there have always been inflationary pressures like the ones you mention above, for as long as there has been a monetary policy. The outlier in the past couple of years is the enormous quantitative easing, which went on for way too long.
100% agree, that's where we're heading. Negative rates. American public won't settle for less. Which is why we went so nuclear with rates and QE at the outset of Covid and why we waited so long to reverse. I suppose that's my bigger point here. Public sentiment drives a lot of these moves, whether they'll admit it or not.
Seems like overkill when the fed now doesn't seem to be just happy with lowering inflation, but are also adding higher employment and "resetting the housing market" to their list. Who benefits from high unemployment? Just Employers?
The dual mandate (UE & inf) is a bad idea. inf should be their only concern. W/o the dual mandate, they’d’ve acted sooner Real int rates are still neg. UE is too low. The mkt is going down not so much due to a “cratering economy” as it is just using a higher rate to discount future expected cash flows. Very mechanical
Powell is a fool. Anyone with a lick of sense could see that the Covid response and then Biden’s spending and other policies would lead to this, but he kept singing the Transitory Song. He should have starting raising rates in late 2020 when it became apparent that no matter who won there would be huge Covid spending. I didn’t think we would do worse than Greenspan in my lifetime but we certainly have.
the supply chain mess is unprecedented and yes there have been wars, but energy hasn’t been weaponized like this ever, other than the opec crisis in the 70’s and we got exactly what we have now. Rising rates, no real relief and a crappy economy. As far as QE, I agree they could have stopped it much earlier but let the markets dictate far too much. And making a thing around tapering it now is a bit silly since mortgage loan volume has dropped significantly and corporate boring will follow with the rising rates anyway. And it went nearly a decade and a half without causing an inflationary corrective recession, the difference was all the things that changed in the pandemic. The stimulus packages, energy shortages, supply chain disruptions etc. The timing wasn’t a coincidence. And you can’t fix the supply chain or Russia with interest rate hikes. You usually fix bubbles with hikes. Asset bubbles, debt bubbles, spending bubbles etc…this go round isn’t that. Other than maybe stocks, which this has effectively tamed. So we will see where we are in a 6 months or a year, but my guess is that it won’t be good. Jmo.
Raising rates is a mistake. Inflation currently is caused by supply and labor shortages, not too much purchasing Inflation is transitory until labor and supply chains are corrected - transitory will be years (another 18 mos) GDP went backwards during the pandemic and that included government spending Destroying the house building market is a mistake which will trickle into rent Messaging from the administration is terrible and leading people to believing incorrect diagnoses
Fed policy in that time frame was inflationary. It was intentional to offset/prevent the deflation caused by the the housing bubble (one of Greenspan’s Bubbles). Once housing was stabilized the fed should have been setting rates higher. Doc is right about the dual mandate, there are too many potential conflicts between the two mandates for them to be effective. With the foolish government policies responding to Covid there was unemployment pressures created that they had to respond to. But once again, they went along for the ride with the foolish politicians and here we are.
In my opinion, the Fed is doing the “right” thing on rates, if you have a certain point of view. No doubt they are looking for certain indicators. Central Banks are looking for a softening labor market and jobs being shed coupled with personal bank accounts being depleted. Then all the surplus pandemic money under Trump and Biden will have found its home in the top 0.01% hands in the form of real assets — a further indenture of the common man and woman. OT: I fear the Fed will announce a CBDC in the midst of this crisis. We will be confined to a tracking CBDC that constrains our freedom and anonymity of cash.
Water puts out most fires regardless of cause. Raising Int rates is the best course of action at the feds disposal.
Fed kept rates too low for way too long. Should have raised rates long before they did and now will raise them too high and kill the economy. Recession becomes self fulfilling, just a matter of how bad.
Good points about the dual mandate. Each mandate is kind of driven by public sentiment. High unemployment = people freaking out, what can we do? High inflation = people freaking out, what can we do? Back to my point that the Fed is all too often trying to appease public sentiment, instead of doing the right thing in a timely manner.
