The Fed’s job is to promote economic stability via:
- Low and stable inflation, and
- Maximum employment.
This is done primarily by adjusting interest rates and through open market operations (purchasing securities) also known as Quantitative Easing (QE).
Not a lot of tools, but VERY powerful ones: small movements reverberate through global markets. The most significant of late is the UK pension system, which was on the verge of collapse as a result of dramatic increase of interest rates and employing derivatives for leverage?!
The Fed is our driver: no hard braking, no jack-rabbit acceleration and definitely no drunk driving.
So why did the Fed run rates up on us 3.0% in 6 months; the fastest rate in 40 years? It's worse than that! They were still buying securities in the open market (QE) in March 2022, the same month they first raised interest rates! One hand saying STOP the other saying GO. This is ludicrous and irresponsible.
From Josh Brown referring to Jerome Powell: “If you’re buying mortgage and treasury bonds to stimulate the economy in the month of March and then deliberately trying to crash the markets and create a recession in September, you’re probably not the right person to have in charge of the money supply. You may not be the “price stability guy.”
Our Treasury Secretary Janet Yellen was still calling inflation transitory in October 2021. That’s when stocks were peaking, bitcoin was at $56,000 and NFT’s were still selling for millions of dollars. 20/20 hindsight, but with inflation at 6% it's hard to understand why there wasn’t a small rate hike or pull-back on QE in 2021. Obviously, nobody wanted the music to stop; a party of epic proportions.
Also consider that the Fed basically NEVER raised rates from 2009 thru 2016. 7 years of free-money.
The Fed had to act, but they could have acted sooner and more responsibly. And now they are proclaiming that they will defeat inflation at any cost. At the cost of your 401k, your job and who knows what else they’ll break along the way. Again, not saying a market pull-back and correction was not warranted, but the Fed could have and still can act more prudently.
The Fed has handled the last 12 months poorly. If Jerome Powell and Janet Yellen were public company CEO’s they’d be fired. Ironically, Ben Bernanke, who led the Fed from 2006 - 2014 was just awarded the Nobel Prize. He and team were responsible for near zero interest rates from 2009 - 2016.
Keep in mind, the Fed does not have the tools to fix “supply” side inflation. Raising interest rates and controlling the money supply does not fix supply chains and OPEC controlled oil prices.
In Conclusion
Cathie Wood of ARKK laid out some good arguments for the Fed to slow down a little and look to some leading indicators. Inventories are rising and many commodity prices are falling. Unfortunately, oil and energy prices are not falling, but does crushing demand and driving up unemployment help?
I’ll add that it's ridiculous in this day and age of technology that the Fed is looking at lagging economic indicators – including surveys – and applying so much judgment to determine interest rates. Arguably they should be plugged into real-time banking, FinTech and other feeds and have an algorithm guiding the approach.
And Finally, each member of the FOMC needs to stop soapboxing their opinions. Remember the days when the Fed gave a speech once per month and that was it.
If the Fed has to reverse course by more than a 1% in 2023, that’s probably a decent sign of failure in policy.