{"id":56228,"date":"2022-01-27T13:58:27","date_gmt":"2022-01-27T18:58:27","guid":{"rendered":"https:\/\/www.ino.com\/blog\/?p=56228"},"modified":"2022-01-27T13:58:27","modified_gmt":"2022-01-27T18:58:27","slug":"failure-to-launch","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2022\/01\/failure-to-launch\/","title":{"rendered":"Failure To launch"},"content":{"rendered":"

Can everybody just chill a little? Yes, the Fed is \u201cindicating\u201d it\u2019s moving to a less accommodative stance, no more government bond purchases, higher interest rates, maybe a decrease in its massive $9 trillion balance sheet, but it\u2019s decidedly not going away. It simply can\u2019t. Tightening? Hardly. <\/p>\n

Indeed, as the results of its January 25-26 monetary policy meeting<\/a> show, the Fed is basically being dragged kicking and screaming into stopping its asset purchases and raising interest rates to fight inflation, neither of which it actually announced at the conclusion of the meeting. Rather, it said it would buy \u201cat least\u201d another $20 billion of Treasury securities and $10 billion of mortgage-backed securities before ending the purchases \u201cin early March.\u201d It also didn\u2019t raise interest rates, instead saying, \u201cit will soon be appropriate to raise the target range for the federal funds rate.\u201d Whenever that is, although everyone seems to believe it means its next meeting, which is set for March 15-16 (there\u2019s no meeting in February). But again, the Fed didn\u2019t say that.<\/p>\n

If inflation is so darn dangerous to our nation\u2019s economic health, why is the Fed willing to let it run another month or two before it starts acting instead of, to use Jerome Powell\u2019s famous phrase, simply \u201ctalking about talking about\u201d it? <\/p>\n

As I argued in my previous column<\/a>, the supposed \u201ctightening\u201d of Fed monetary policy is more a temporary political expedient to try to save the current ruling party from disaster in November than a belated panic move to stave off rising inflation. The recent spike in inflation to above 5%, the highest in decades, the media tells us, may very well be short-term. While the Fed has backed off using the word \u201ctransitory\u201d to describe this phenomenon, it still seems to believe that it is, in fact, temporary, although a little longer lasting than it previously believed. <\/p>\n

The market\u2019s recent selloff, the major stock market indexes in correction territory, bond yields higher by about 40-50 basis points\u2014therefore seems a bit overdone. Why should the market take the Fed seriously this time when it just can\u2019t pull the trigger on ending asset purchases and raising rates? After all, this is the second meeting in the past two months where the Fed merely indicated what it was thinking about doing but didn\u2019t actually do anything at all.<\/p>\n

But let\u2019s just say for the sake of argument that the Fed really is going to finally start ending accommodation. It would lose a lot of credibility, not to mention possibly throw the markets into a lot more turmoil, if it didn\u2019t eventually follow through on its warnings. I guess we\u2019ll have to wait and see how serious it is.<\/p>\n

You do have to ask yourself, though, how \u201chawkish\u201d is the Fed really going to be going forward? Yes, it probably is going to reduce if not stop its asset purchases, and yes, it\u2019s probably going to raise interest rates. It may even start to reduce the size of its balance sheet someday; no mention of that at all in its post-meeting press release, you\u2019ll notice. But there are limits in how much it can retreat from the economy. It\u2019s simply too big a factor in how the American government and global financial markets operate to back off too much.<\/p>\n

The government continues to run massive deficits proposes more bills to spend even more, but you hear next to nothing about how all of this is going to be funded. When was the last time you heard anything from Washington about a potential tax increase? It\u2019s an election year, so forget about it for now.<\/p>\n

That leaves the Fed, which has financed all the trillions that the government has spent over the past two years to fight Covid-19. It simply can\u2019t back away now, at least not in any meaningful way.<\/p>\n

If anything, the new members of the Fed recently nominated by President Biden are likely to make the Fed even more dovish, not less. Lael Brainard, his nominee to be vice-chair, is much more dovish than Powell himself, which is saying a lot. Biden also named two other people to fill vacancies on the Fed board. Do you really believe that he would name inflation-fighting hawks to the board in this or any other environment? <\/p>\n

Another thing to remember is that the Fed\u2019s natural inclination is to be dovish because that is how it exerts most of its power by controlling a huge supply of government bonds, of which it now owns almost 20% of the total. By reducing its balance sheet, it gives up power and influence, something large government bureaucracies, and make no mistake; the Fed is one of the biggest in terms of dollars, never do. It would be institutional suicide.<\/p>\n

So let\u2019s relax. The Fed will be here for a long time to come. <\/p>\n

Visit back to read my next article! <\/p>\n

George Yacik<\/a>
\nINO.com Contributor - Fed & Interest Rates<\/p>\n

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Can everybody just chill a little? Yes, the Fed is \u201cindicating\u201d it\u2019s moving to a less accommodative stance, no more government bond purchases, higher interest rates, maybe a decrease in its massive $9 trillion balance sheet, but it\u2019s decidedly not going away. It simply can\u2019t. Tightening? Hardly. Indeed, as the results of its January 25-26 […]<\/p>\n","protected":false},"author":16,"featured_media":56230,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6920],"tags":[4912,9264,6824,6938,1750,230,5442],"class_list":["post-56228","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-ino-com-contributors","tag-consumer-price-index-cpi","tag-fed-chair-jerome-powell","tag-federal-open-market-committee-fomc","tag-george-yacik","tag-inflation","tag-interest-rates","tag-the-federal-reserve"],"yoast_head":"\nFailure To launch - INO.com Trader's Blog<\/title>\n<meta name=\"description\" content=\"The Fed is basically being dragged kicking and screaming into stopping its asset purchases and raising interest rates to fight inflation.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.ino.com\/blog\/2022\/01\/failure-to-launch\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Failure To launch - 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