— Fed Obsession, much of it is media-inspired with little in the way of real perspective … their conclusion is always negative.
— Inflation is today’s monster issue. Since fiscal restraint has become a lost art it is up to the Fed to slay that dragon all by itself.
— The trigger yesterday were comments by Fed Governor, Lael Brainard, suggesting that the draw-down of the Fed balance sheet could come at a much more rapid pace.
— We got the answer on that today (4/6/22) with the FOMC meeting concluding statement.
— None of the policy moves were surprising, Draconian, bull-market-ending or a reasons to sell stocks.
Every time the Federal Reserve Open Market Committee meets it seems that the period immediately preceding the meeting is a time of laser focus (Fed Obsession) on what they are going to do and say after their meeting wraps up. The general assumption is whatever it is, it will probably be bad news for stocks. This is true even if they are expected to lower rates or increase quantitative easing because either of those actions would indicate the presence of a shaky economy.
This is learned behavior that is fostered by the media and the legion of pundits they employ. The message is usually negative … bad news sells … and it comes with little or no perspective with which the investor might might make his or her own informed decisions.
Inflation, the monster issue
Inflation is obviously top-of-mind for many in the investment world. Since no red-blooded politician would dare cut spending or raise taxes (i.e. fiscal restraint) it seems that the ball is entirely in the Fed’s court to do its sacred duty, maximizing employment while providing price stability. Unfortunately, supply chain issues, as well as, energy and food prices are really not susceptible to Fed policy. Labor shortages would be something the Fed could fix by driving us into a recession but this would fly in the face of their dual mandate requirement to maximize employment. Needless to say, they have some thorny issues to face.
Comments by fed officials get the ball rolling down hill
Tuesday April 5, Fed Governor, Lael Brainard started things off with a statement that the trimming of the Fed balance sheet might be coming at a much faster pace. This was followed by Philly Fed President Harker saying that he was “acutely concerned” about inflation.. Their comments provided the media with a clear focus bad news story to run with. The ensuing market weakness was predictable.
We got the answer Wednesday (4/6/22) as to just how tough the Fed would be in its inflation fight
To me it was a ‘meh’ moment. Aside from the already announced plan to raise the Fed funds rate 4 or 5 quarter-point bumps over the next year, the draw down of the Fed balance sheet does not seem to be that rapid at $95 billion per month (about $5 bill a day on a 20 trading day month). If you were thinking “aggressive,” think again. At this pace it will take four or five years to get the current $9 trillion Fed balance sheet back to pre-pandemic (still bloated) levels of around $4 trillion.
To put the market impact of this move in perspective according to the Securities Industry and Financial Markets Association (SIFMA), the average daily trading volume in US Treasury securities in 2021 was $624 billion. In the case of mortgage backed securities the number daily was $279 billion. Adding an extra $2.5 billion in supply to either of these categories daily will have little or no effect on interest rates. Likewise the monthly shrinking of the balance sheet would take years to have a marked effect on shrinking of the availability of credit. Bottom line: None of this was surprising or a reason to sell stocks.
THE FED IS MOVING RATES OFF EMERGENCY LEVEL LOWS, AND IN THE CASE OF THE BALANCE SHEET,IT IS BEGINNING TO REDUCE IT FROM EMERGENCY LEVEL HIGHS. AS THERE IS NO EMERGENCY WHY IS THERE SO MUCH FEAR AND NEGATIVITY ASSOCIATED WITH THESE MOVES? THE ONLY ANSWER I CAN COME UP WITH IS MEDIA HYPE AND MIS-INFORMATION!
Fed obsession is a gigantic waste of time that is likely to cost you money if you get caught up in it.
What’s your take?
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