In a piece at Bloomberg Mohamed El-Erian warns that the Federal Reserve is taking substantial risks:
The other notable development this week came in Fed Chair Jerome Powell’s semiannual testimony to Congress on Wednesday, when he acknowledged that inflation has been coming in above the central bank’s expectations and lasted longer. Yet when it came to policy implications, he immediately reverted to the often-repeated “transitory†mantra to support no change to the policy stance. New York Federal Reserve President John Williams delivered a similar message on Monday, confirming that two of the three most influential Fed officials — and the ones that markets listen to most closely — remain fixated on maintaining ultra-stimulative policies notwithstanding the repeated underestimation of both growth and inflation.
The longer this configuration persists, the greater the risk of a monetary policy mistake. This is particularly true now that Fed policy is governed by a policy framework that has shifted the trigger for action from forecasts to outcomes. Indeed, having resisted pressure to be specific with two key policy influencers — the length of time for assessing transitory inflation and the quantitative definition of “flexible average inflation targeting†— the Fed can continue on this path for a while. And it will probably do so given the Fed’s other conviction, which a growing number of economists also worry about: that the central has the policy tools to react quickly and effectively if need be and, importantly, without causing economic and financial disruptions.
The facts on the ground, as well as the Fed’s traditional emphasis on risk management and building up policy insurance, call for the world’s most powerful central bank to start easing its foot off the stimulus accelerator.
He proposes that they start by cutting a relatively small portion of the monthly purchase of financial assets. What he doesn’t say is what the reaction to that would be. Spoiler alert: it wouldn’t be good.
That’s supported by this observation of his:
The longer the economy-policy disconnect continues, the greater the risk-taking by a marketplace that has been conditioned to expect and profit from ample and predicable Fed liquidity injections and the greater the risk of market accidents. There have already been three near accidents this year. Should generalized market disruptions not be avoided next time around, the Fed would face even greater policy challenges given the adverse spillbacks to the real economy.
It could range from a relatively minor correction to a panickked sell-off.
He’s too discreet and cautious to say they’re screwing up but I believe that’s what he’s thinking.
It sounds to me like the Fed governors need to have more skin in the than they do at present.
Every pension either directly or indirectly depends on the stock market, and that includes Social Security via its connection to general tax revenues and the broader federal budget commitments (debt interest). Unfortunately, it appears the Dow et al. are artificially inflated by the Fed, in part by keeping interest rates low, and in part by buying securities. If higher interest rates do crash the stock market, that must translate into lower pension payments and, eventually, reduced social security benefits. All exacerbated by inflation.
That looks risky to me. Can a country already being torn apart by identity politics survive a depression? The US was almost 90% White and Christian in the 30’s; not now. Doomists like to speculate on what would happen if the EBT cards held no money. What happens if pension payments are cut, too?
What would happen?
A stimulus package that would make the last look like peanuts, and save the planet to boot.
We’re living in the future, baby!