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It is said that Federal Reserve policy actions have a delayed effect, but what simple adage best describes the consequences of the initial massive overreaction and subsequent reckless inaction?
What markets have not yet fully appreciated is the significant downside risk inherent in both the Fed's reckless “exceptional” policy actions taken after the height of the 2008 financial crisis and the further hysterical response to the COVID-19 panic, and its inaction after these policy missteps resulted in textbook clear and not-at-all-“transient” monetary inflation.
Make no mistake: the era of the Fed’s quantitative easing and zero interest rates is coming to an end, and as we move further from the “Great Moderation” to the “Great Disturbance”, history will judge these actions harshly and reveal the great and powerful Nobel Prize winning Keynesian wizards to be panicked academic wimps who corrupted our monetary system and utterly distorted all our markets, our public finances, and a now deluded generation of “investors”.
Similar to Fed Chairman Bernanke's testimony in March 2007 that the subprime market turmoil was “contained,” Powell's 2021 “temporary” narrative is a blatant farce that seeks to portray highly problematic emerging economic trends in a light that is simply not true, thereby seriously undermining the Fed's credibility and allowing things to get even worse before any real policy action was implemented.
But unlike in 2008, when the Fed first exhausted all of its normal policy tools and then overreacted and intervened in markets in unconventional ways, Fed Chairman Powell now has all the tools he needs to respond to the current economic situation but is too timid to use them fully.
Today's inflation is not temporary, supply chain related, or the result of the China lockdown, the Ukraine war, or some recent “scam” fueled by state policy maniacs.
The inflation we are currently experiencing is simply a long-delayed monetary inflation resulting from the Fed's own reckless “loose monetary” policy actions.
To make matters worse, the Fed's reluctance to acknowledge this fact allowed inflation to continue to run wild, becoming a deeply ingrained and intractable factor in the minds and behavior of all market participants.
The increases in the fed funds rate so far have fallen well short of what is needed to stem ongoing inflationary pressures, and rates remain well below the most optimistic projections for price increases (PCE, core CPI).
As Chairman Powell himself said in his September 21 press conference, “We want to see positive real interest rates across the entire yield curve.” However, the Fed continues to delay achieving this tighter yield curve.
After the dreadful September CPI report (and PPI), it is clear that inflation is well beyond the levels that the Fed’s typical forward guidance and regular Fed meetings can keep it in check.
The Federal Reserve needs to take bold, big policy steps.
At this point, the only option for the Fed and Chairman Powell is to issue an emergency rate hike between meetings.
An unplanned, unexpected and massive Fed policy action would provide the necessary shock to markets, putting a final and permanent end to all forms of speculative delusion, bringing participants to their senses and the sudden realization that the era of “easy money” is over once and for all.