January 31, 2022
[This blog post is an excerpt from a commentary published at TSI last week]
After the FOMC assembly on Wednesday twenty sixth January, the Fed — by way of a post-meeting assertion and a press convention — made it clear that it plans to finish its bond monetisation (QE) program in early-March and hinted strongly that it’ll make its first fee hike of the cycle in mid-March (the time of the subsequent FOMC assembly). The Fed additionally mentioned its intention to considerably scale back its steadiness sheet.
What the Fed expects to do and what it finally ends up doing are sometimes very completely different. At present the Fed expects to hike its official rate of interest targets in March-2022 as a part of a rate-hiking marketing campaign that may entail 4 fee hikes this 12 months and extra fee hikes subsequent 12 months. Nonetheless, we suspect that the March-2022 hike will develop into this 12 months’s solely hike, as a result of by Could-June it will likely be clear to the backward-looking Fed that each “inflation” strain and US financial progress peaked in 2021.
Furthermore, we’re assured that the Fed won’t ever considerably scale back its steadiness sheet. It might nicely begin to scale back its steadiness sheet over the rest of this 12 months by not changing maturing debt securities, however it would react to the subsequent critical financial decline the best way it has reacted prior to now. Consequently, its steadiness sheet in all probability can be a lot bigger in 18 months’ time than it’s right this moment.
The insurmountable downside confronted by the Fed is that after an funding bubble of adequate magnitude to have an effect on a big a part of the financial system has been inflated, there isn’t any solution to let the air out of the bubble with out wreaking financial havoc. To postpone the politically unacceptable financial havoc that will end result from real deflation, each downturn should be met by progressively bigger floods of latest cash. The endgame is hyperinflation and/or a reset involving the institution of a brand new financial system.
We expect that the endgame remains to be a few years away. Within the meantime, be ready for extra waves of financial inflation resulting in more and more apparent value inflation, interrupted by the occasional deflation scare.