MCViewPoint

Opinion from a Libertarian ViewPoint

Why Fighting Inflation Is Not a Priority for the Fed | Mises Wire

Posted by M. C. on January 29, 2022

While a few quotes do not define a person, they’re worth paying attention to. I get the impression that these people want to expand the Federal Reserve’s power and believe the threat of inflation pales in comparison to climate change and racial inequities. So, in a world where investing largely revolves around guessing how a group of seven people will choose to arbitrarily tinker with our country’s financial system, I’m betting these folks will stay looser for longer.

https://mises.org/wire/why-fighting-inflation-not-priority-fed

Liam Cosgrove

On Wednesday, the Federal Open Market Committee (FOMC) held true to its monetary-tightening timeline despite last week’s 10 percent drawdown in most major indices, effectively saying, “10 percent is not enough.” With retail sales numbers that will surely return to trend without more stimulus (see chart), a gridlocked Senate, and the prospect of higher interest rates surely to discount equity valuations, why aren’t more people selling?

lc

Don’t get me wrong, the Fed will cave eventually, but they just sent a clear message that they need to see more selling. Will they ever make it to “lift off”? This handy chart, courtesy of the Macro Tourist newsletter, can shed some light:

lc2

As you can see, there has been just one rate hike post-1988 during which the S&P 500 was more than 10 percent off its fifty-two-week high. This rate hike was enacted by Jerome Powell and set off the infamous Taper Tantrum episode. So, we have two months before he is faced with this decision again. Suppose the market remains relatively flat or even increases between now and March. Given yesterday’s tolerance and historical precedence, I’d bet on lift off proceeding, which would hurt valuations. Alternatively, if the market continues to decline before the March meeting, historical precedence and Powell’s taper trauma tell us there will likely not be a rate hike in March, which is where things will get interesting. Long story short, markets are going down before they go up. I ask again, Why isn’t everyone selling?

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