By Charles Stampul
Stocks declined sharply yesterday in response to the release of FOMC meeting minutes showing a commitment to increase (or normalize) rates sooner than expected.
If the Fed really intended to normalize, however, they would do it slowly so as not to cause too many disruptions. Most likely, instead, they are shortening the timeframe for cuts (and Treasury sales) to be able go in the other direction as soon as possible.
Monetary policy is always downstream from fiscal policy. There can be no normalization without austerity. There can be no austerity, at this point, without civil unrest.
Most of the 1.9 Trillion appropriations bill signed by President Joe Biden on March 11, 2021 has yet to be spent. This is money that will go into the economy as worker participation and productivity is falling. It is an inflationary tidal wave already in motion.
The Fed is trying to trick the public into thinking it is doing something to stop it when in fact it has little ability to.
By trimming asset purchases and raising rates the Fed is putting additional Treasuries into the market for individuals and foreign governments to buy at a greater cost to the Federal government. If it goes to far in this direction it will collapse the Treasury market and the dollar.
If the Fed fails to normalize policy on the other hand, it inflates away the value of Treasuries and the dollar. It’s a trap that the Fed can not get out of. Not, that is, without the help of Congress and The President.
The Federal Reserve has been monetizing debt for over ten years now. No nation has ever come back from this. The only way one could is by making massive cuts in government and government spending.
