What They Will Never Teach You At StanfordBusiness School Is That The Fed Won’t Reverse Course

Fed’s Bowman saying what I have been saying for quite some time which is that Fed policy is simply not restrictive enough to bring inflation back down to 2% as financial conditions remain considerably looser overall today than they were at the start of the tightening cycle: 

“Given the current stance of policy, I continue to be concerned that easier financial conditions over the past year may have contributed to the lack of further progress on slowing inflation. In light of the ongoing strength in the economy and with equity prices substantially higher than a year ago, it seems unlikely that the overall level of interest rates and borrowing costs are exerting meaningful restraint.”

Markets will continue to press the Fed via higher asset prices for gold/bitcoin/equities which will drive inflation expectations higher and then ultimately higher inflation and ultimately force them to recognize that it needs tighter policy in order to bring inflation back down to target. 

Now that they are on long pause, perhaps they should be looking at using their balance sheet more aggressively in order to withdraw liquidity in a way that help dampen the wealth effect impact on inflation. 

They should be using their 5 year review process to address this. It’s been a real problem that they put QT on such a passive course, allowed it to be hijacked by Treasury, wound up extending the WAM of their holdings as they continue to reinvest maturities in long duration securities. Never too late to change course.