The fed was wrong. 2008 was the odd case where the fed was able to print oceans of money and face little to no inflation. That is not the new normal. How do you ever say the words “new normal” in finance and not think you’re wrong?
However, the fed is doing something great, and I wish we saw it from our politicians. They admitted they were wrong, and they are fixing it. The damage was done, now they are working toward fixing the issue. The fed clearly isn’t caring that the markets are dropping, and that’s great, they shouldn’t care.
I do subscribe to the school of thought that a little, roughly 2%, inflation is good. I would also rather see 5% inflation than 5% deflation. Hence, when in doubt, and the fed should always be in doubt, lean on the side of hawkish. With inflation over 8%, there should be little doubt, rein it in.
You can blame the fed for inflation and the negative impacts of rising rates, but doing so is counterproductive. The mess has been made. They are owning up, and cleaning up.
When covid-19 first struck, they used the toolkit they gained from the 2008 crisis, which means flooding the markets quickly with liquidity. Interest rates act like gravity on all assets, when interest rates drop, asset values rise and vice versa. Assets only have value when they are productive. If productivity disappears, interest rates don’t matter. The fed was worried about productivity disappearing.
I think the realistic question to ask yourself is: Do you want the fed being optimistic regarding what lockdowns and the virus would do to the economy? The upside of an optimistic fed is today we might have lower inflation numbers, and employment would be about the same. The downside of an optimistic fed, could be exceptionally high unemployment, and far worse supply problems. Exceptionally high unemployment, is an awful problem that can easily spiral downward.
The fed needs to weigh the downsides of avoiding inflation. With hindsight, I think its clear they printed too much money. The problem is there is no way of knowing exactly how much is enough, and how much is too much. Perhaps it is better to print a little less than you need, simply because ramping up is easier than slowing down. And in this case they overdid it.
The fed has come out and admitted they were wrong about how much they could get away with printing, and now they are cleaning up the mess. Hats off to them.
As I publish this, the Fed is in a meeting and markets are anticipating rising rates. We shall see what happens. Now that I’ve put this in writing, the smart thing to do for all forecasters is presume the odds of them raising rates has dropped.
On a personal note….Did they have to admit they were wrong right when I needed to buy a house? I’m watching my budget go down month by month lol! For those confused as to how rising rates drops asset values, imagine you’re looking to buy a house right now. How much can you bid for certain houses under different interest rate environments? It’s your monthly budget that impacts what you can pay total. If rates are low, you can afford more house.