Is the Federal Reserve Serious
The Federal Reserve Bank has been one of the biggest causes of inflation in the last two years. Is the Federal Reserve serious about getting out of the business of increasing inflation? The three biggest causes if ranked:
- Federal government overspending and excess stimulus 2020 and 2021
- Bad federal government policies in 2021
- Federal Reserve policy mismanagement 2020 and 2021
- Pandemic caused supply chain issues
The first two causes have already been put in place and no change appears to be on the horizon. The fact that the most recent spending bill hasn’t passed and may be scaled down means it wont cause as much additional inflation as it would have. Unless it goes away entirely. In that case, inflation won’t be as high as it could be if it passes. But the Federal Reserve may already be too far behind the curve on inflation and asset bubbles that a severe correction may be unavoidable. Buckle your seatbelt.
Scaling Back?
The Federal Reserve claims it will scale back its poor policy decisions and mismanagement which severely boosted inflation. As of its November meeting, it announced it would decrease the $120 billion per month it was adding to inflationary programs. That would have ended the program in June 2022. Then in December, it announced it would more quickly decrease the inflationary policies by dropping purchases by $30 billion per month. The result would allow purchases of $90 billion in January $60 Billion in February and $30 billion in March. It would then end buying, but not start selling. So why did the Fed spend $80 billion in one week in Mid January and already more than $100 billion in just early January? And another $12 billion at the end of January? That’s nearly $120 billion and not in line with its announcement. Is the Federal Reserve serious about ending its bad policies or is it still playing politics and gaslighting? This week the Fed raised interest rates (March 16) and supposedly ended asset purchases. It swore off its addiction. But (surprise!) then the Fed turned around and bought another $44 Billion of assets this week alone!
Inflation has pushed up prices in housing, stocks, crypto, and other assets into a bubble. Other items less so. But 10%-20% price hikes by food companies, restaurants, fast food, and other necessities eat away a budget quickly.
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‘Inflation panic’ driving Fed to consider early end to bond-buying program
In response to soaring inflation and a tight labor market, the Federal Reserve is considering when it will start selling assets which now almost $9 trillion. This would start the wind-down of its absurdly loose monetary policy weeks ahead of schedule.
The Fed stated it would slow its $120 billion in monthly purchases of Treasury Bonds and mortgage-backed securities (MBS). But that was talk. The first step in changing course by the Fed always involves trying to persuade the market with talk.
The Fed initially indicated in November 2021 it would slow its buying such that an end might occur by June 2022 to slow the “transitory” inflation. Meaning the Fed didn’t believe the inflation was real, only a temporary blip. And meaning the Fed didn’t believe it played any role in the massive build-up of inflation. Also meaning the Fed was still in denial. As expected by everyone but the Fed, the market found the Fed action to be too little and out of touch.
Transitory?
In December 2021, the Fed stated that it needed to retire the word “transitory.” The Fed realized they were utterly wrong and no one believed them. It announced it would decrease its bond buying at a faster rate so that the program might end in March 2022. Note they would only stop buying. That didn’t include selling any of the nearly $9 trillion of bonds and MBS they had bought to pump up the economy. But, so far in 2022, the Fed is still on track to buy more than $120 billion for the month. Does that mean they lied, were incompetent, or were all talk and no action? That still remains to be seen.
But inflation hit its highest level in 40 years and Americans quit jobs at record rates. Many predict the Fed will now looking at ending its asset purchases following the Fed’s Jan. 25-26 meeting. “There is a clear sense of inflation panic coming from the Fed,” said Antoine Bouvet, a senior rates strategist with ING.
Space for a hike
Deciding to end the bond-buying program at the January meeting was thought to allow the Fed to manage ending the program without an immediate rate hike. That would “create a bit more space between the end of taper and the first rate hike,” said Neil Dutta, head of economic research at Renaissance Macro Research. “The optics I think would be good for the Fed because it makes no sense to keep buying assets when it is so obvious hikes are around the corner,” Dutta said. But so far, the market has already priced in rate increases of 1% to 1.25%. so look for an announced rate hike of 1/2% in March.
Later this year, the Fed plans to start reducing its balance sheet. At nearly $9 trillion due to its bond-buying program, it may take a decade or more to right size. The market also expects the first rate hike to follow the FOMC’s March meeting. The odds of a rate hike at the Fed’s March meeting, non-existent just a few months ago, are now at about 92%, according to the CME FedWatch Tool.
Balance sheet reduction
With the first rate hike looming, Fed officials have ramped up talk of reducing the central bank’s balance sheet. “It’s far above where it needs to be,” Fed Chairman Jerome Powell told the Senate Banking Committee on Jan. 11. After the December FOMC meeting, the Fed announced it was winding down its bond purchases faster. This caused the market to expect as many as four rate hikes this year instead of the possible 1 or 2 expected 6 months ago. However, some analysts still expect the Fed is hesitant on ending its bond buying addiction.
“Tapering appears to be a set course that is well understood by markets, but if the Fed wants to sound hawkish they could suggest that runoff may be starting both sooner and may proceed more rapidly,” said Gennadiy Goldberg, a senior U.S. rates strategist at TD Securities.