Federal Reserve Wakes Up to Its Blundering Policy Mis-Management
Updated. Finally, the Federal Reserve Wakes Up to Its Blundering Policy Mis-Management. It took a long time, but apparently the Fed recognized what we have said for most of the year. The Fed is the primary culprit in policy mis-management in causing runaway inflation.
Federal Reserve officials intensified their battle against the hottest inflation in a generation. It shifted the end of its asset-buying program to earlier in 2022. It also signaled raising interest rates in 2022 at a faster pace than expected. Well, faster pace than the Fed expected, but not faster than what we expected. The Fed was caught unawares on its basic tasks as it veered from its mission mandated by law into social engineering and politics.
Heralding one of the most hawkish policy pivots in years, the central bank said it will double the pace at which it’s scaling back purchases. The purchases of Treasuries and mortgage-backed securities will reduce by $30 billion a month. That implies it will conclude the program in early 2022 (read – end of March 2022), rather than mid-year as initially planned.
Inflation Control and Panic
Will the efforts of the Fed in 2022 be enough to forestall inflation through 2025 already baked in at a higher level? The Fed has not yet ventured into selling any of the now $8.7 trillion of assets it acquired to hold down interest rates. How much of a financial loss will it absorb in the unwind. Likely in excess of $100 billion. But then again, it’s just play money to the Fed. They don’t need to manage their bank account like every normal family in the US that it has affected through its asset bubbles.
The real damage hasn’t yet occurred. The inflation problem the Fed started will continue. Wait until the asset bubbles get pricked. Keep your powder dry. Follow our recommendation for a possible buying window as well as planning set out in Winning Mortgage, Winning Home. After all, you don’t want to lose 15% to 25% of your home investment in the year after you buy a home, do you?
Future Interest Rates and Housing Prices
A question on housing and interest rates yet to be answered… If the asset bubble gets pricked, asset values will fall (stock market, home prices, crypto prices/bitcoin etc). Currently, the yield curve is extremely flat. Interest rates may rise, but will the yield curve invert? An inverted yield curve has some short term interest rates higher than long term rates. This would be a sign of a recession, either already occurring or likely in the near term. If so, although short term interest rates (ARMs and deposit interest) may jump, long term rates may not rise as much (mortgage rates). That would give home buyers a possible opportunity to buy a house where prices dropped and interest rates remained generally attractive. Maybe not historic lows, but generally attractive.
Keep an eye out. After all, once the Federal Reserve wakes up to its blundering policy mis-management, it loses much control over rates and price stability. It freezes. Fear in the market or greed in the market then start to play an outsized role. Call it not FOMO, but Fear of Buying In (FOBI). This gives planners an outsize opportunity to buy in at low prices if it materializes.