ACTV - It's Monopoly Money

Summary

• The Fed uses its Monopoly Money to control both rates and yields to push the Treasury markets first and all other bond markets as a consequence of the Treasury markets as they push and pull their currency as they see fit.
• Currently, they are in a fight with inflation. It has been a bruising battle that has affected not only the bond markets but the equity markets.
• They need to let things cool down, and heading to 2.00% nonstop is going to be quite hazardous, in my opinion, for both the economy and all of the markets.

What is controlling both the debt and equity markets is the Fed. They are a singular institution that reports to Congress, as directed by the Federal Reserve Act of 1913. While the Presidents and Governors are independent, I point out that the institution itself is not. However, the Fed acts as if it was independent, and the Congress does little or nothing to curtail this notion.

Consequently, the Fed has become a monopoly, and it uses its Monopoly Money to control both rates and yields to push the Treasury markets first and all other bond markets as a consequence of the Treasury markets as they push and pull their currency as they see fit. Currently, they are in a fight with inflation. It has been a bruising battle that has affected not only the bond markets but the equity markets. It does not end there, however. The collateral consequences are far-ranging.

In particular, you can look at what our rising rates have does to the stock markets, our housing market, the revenues, and profits of a myriad of corporations that now must pay more to borrow money, and even the U.S. government that now has to pay higher yields on its bonds, which means that the government’s monetary surplus is being drained, and quickly. This is all happening as the United States pushes up against our debt ceiling, and it is causing both confusion and pain, in my opinion.

While the stated goal of the Fed is to get to a 2.00% inflation number, there are a wide variety of ways to accomplish this goal. It is my viewpoint that they should get to a 4.50-5.00% rate of inflation and just stop. A “pivot” is not necessary.

They need to let things cool down, and heading to 2.00% nonstop is going to be quite hazardous, in my opinion, for both the economy and all of the markets. Recently, to the Fed’s credit, many of the Fed’s leaders are talking about smaller rate increases and a slower timeline as they look back at the mistakes made by both Arthur Burns and Paul Volcker.

Neither of our political parties will welcome a recession, no doubt, but the Democrats are still on watch and it will hurt them more than the Republicans, who only control the House. This is why I suspect pressure is being put on the Fed members in private as Janet Yellen and company gently tap them on the shoulder. Inflation may be the “root cause,” but our higher borrowing costs for anything and everything should also be part of the Fed’s equation, even though it is almost never mentioned by them.

It is my hope, in the Fed’s minutes and press conference coming this week, that the rate rise will only be 25 basis points and that the conversations will be more dovish than in times past. This would be a boon to the economy and also a boon to the markets, in my view. So far this year, there has been a “pivot” but none yet at the Fed. Bloomberg reports that the DJIA is +2.51%, the S&P 500 is up +6.02% and the NASDAQ is up +11.04%. This is in stark contrast to the painful bruising that we all suffered in 2022.

Right now, before the Fed’s meeting, may be a very good time to put some money back into equities. The Fed seem to be taking a more cautious approach than they have previously been taking. I applaud them for this. We do not need a “pivot” yet, but just a slowdown or a stop to be very market-positive, in my opinion.

“The prospects for a soft landing have improved markedly.”

- St. Louis President, James Bullard, January 18, 2023

For those of us in the markets, let’s hope that he is right!

Original Source: Author

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