https://www.delftpartners.com/news/views/a-fictitious-memo-to-jay-powell-from-a-staffer-at-the-fed.html

 

In the last 6 months the yield on the 10 year note has risen from 70 bps to approximately 150 bps. This move should give us policymakers pause to reflect. For 25 years now, as you all know, we at the Fed, have essentially run an asymmetrical approach to interest rates and in the guidance of policy to the markets. Always lower if we can and very slow to raise and then never back to where we were. We have thus succeeded in bringing down the cost of government and corporate borrowing to very low nominal levels and probably negative in real terms for several years. We can count this as a success. We now however find ourselves at the expected cross roads. We may have gone too far and there are risks in continuing this monetary policy. To quote Keynes, “Once doubt begins, it spreads rapidly”. We need to decide where we go from here; now.

Our policy over 25 years has produced and reinforced moral hazard. Monetary issuance at every sign of asset price decline, GDP shortfall, or one-off supply side benefit, has created an unprecedently large balance sheet for the Federal Reserve Bank system, potential instability in the US $, and therefore possibly an enormous burden on future US tax payers.

The consequences of this enormous balance sheet and monetary issuance can be seen in the elevated price of stocks, bonds, real estate, and more worryingly in the steadily lower quality of capital allocation and business formation. The only way current asset prices can be sustained is through the continued expansion of our balance sheet and this would jeopardise confidence in our fiat money system.

Unlike one of your predecessors, we think we should act when we can clearly see asset price bubbles and that time is now. Low levels of CPI increases are used by Fed spokesmen as justification for continued loose monetary policy, but every large asset price crash producing economic and social turmoil, also occurred against this backdrop of ‘tame’ consumer price inflation. We are frankly ignoring plain warning signs elsewhere.

Other posts

Thoughts From The Divide: Finding Reasons

BY JON WEBB
The latest flurry of Fed speak has been a broad recanting of the previously guaranteed, 100% for sure, cuts this year, with members saying, “I definitely don’t feel urgency to cut rates”, “I’m not in a mad dash hurry to get there[, to lower rates]”, and “at some point, … we will start to normalize policy back to a less restrictive stance [ed. Ha!], but we don’t have to do that in a hurry”. It’s nice to be vindicated. But now what? Read more →

NDR Dynamic Allocation Strategy January 2024 Update

BY BRIAN SANBORN
Dynamic Allocation Strategy, indicators, weightings update Read more →

C8 Bulletin: MI2 Joins C8 Studio

BY JON WEBB
The C8 Bulletin is back after a summer break, and we are delighted to announce that Macro Intelligence 2 Partners have added their Macro Alpha index to C8 Studio.  The Macro Alpha strategy is deeply rooted in MI2's macroeconomic insights. These directional strategies encompass a broad range of asset classes. The strategy aims to optimize risk-adjusted returns by dynamically-adjusting portfolios based on changing macroeconomic conditions. Taking three of our Global Macro contributers (including MI2), combining using our proprietary Tactical Asset Allocation, would have produced a 24% annual gain with 11% volatility and, notably, a 40% negative correlation to the S&P over the past two years. Read more →
Back to all posts →