The Fed is beholden to the markets. It looks like the Fed has lost its will to fight inflation after this week’s tantrum. It’s only delaying the carnage. Invest accordingly. The Wall Street Journal editorial board writes:
The Federal Reserve on Wednesday showed new determination to fight rising prices, but the fledgling inflation hawks are only learning to fly. The central bank’s moves were modest given inflation of 7%, and it isn’t clear how much resolve the central bank will have if asset prices keep falling in response to the prospect of rising interest rates.
As expected, the Federal Open Market Committee signaled an end to its bond purchases and a rate increase in March from near-zero today. This is hardly monetary tightening. The Fed could have gone cold turkey on bond buying, but it chose to keep assisting asset prices for a half dozen more weeks or so.
Chairman Jay Powell stated clearly in his press conference that the economy no longer needs this monetary accommodation. Yet he ducked questions about whether the FOMC would consider a 50-basis-point increase in March, rather than its usual 25 points. The bigger bazooka is what previous chairmen have fired when inflation was this high.
He also refused to commit on when, or at what pace, the Fed will let its bloated bond portfolio run off as the bonds come due. The balance sheet is heading toward an extraordinary $8.9 trillion, or nearly 40% of GDP.
These signals make us wonder if the FOMC wasn’t spooked by the sharp fall in asset prices since the New Year. The S&P 500 is in correction territory, down about 10%, and the Nasdaq and its growth stocks more than that. The Fed’s bond purchases have been designed to lift asset prices for its so-called wealth effect on economic confidence.
So as monetary policy tightens, what went up might come down. This is no cause for alarm, especially given the astonishing bull market since the pandemic panic of spring 2020. But the Fed has been intimidated by market corrections in the recent past.
Now would be bad time for that to happen again. Inflationary pressures continue to build in the economy, with a tight labor market and rising commodity prices. The longer it takes to break this pressure, the more painful that breaking could be.
Action Line: The risk inflicted on the market by the Fed and inept politicians in Washington may be greater than ever before. Monitor risk by clicking here to sign up for my free monthly RAGE Gauge alert. It’s an in depth analysis of risk in America that you don’t want to miss.
E.J. Smith - Your Survival Guy
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