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Q4 2021 hedge fund letters, conferences and more
Over the past few weeks, Fed speakers were bemoaning inflation and voicing their wishes to squash it. They frequently mention how effective their monetary toolbox is in managing inflation.
There lies a massive contradiction between words and actions within these numerous speeches and media appearances. If the Fed is so intent on fighting inflation, why is it still stimulating the economy and markets with crisis levels of QE? Why is the Fed funds rate still pinned at zero percent?
With this ambiguity comes an abundance of risk for investors. If the Fed walks the walk and fights inflation vigorously, markets are ill-prepared for a sharp decline in liquidity and the resulting instability. Conversely, the Fed may be just talking the talk and hoping inflation starts abating. If so, it may not be as forceful as it appears.
The Fed is walking a tightrope between instability and inflation. Can it successfully tame inflation without causing severe market dislocations? The tightrope is thin, and the consequences of falling off to one side or the other are severe. Investors best think about the Fed’s perilous act it is getting ready to attempt.
The Monetary Toolbox
Since March 2020, the Fed has purchased nearly $5 trillion in government bonds, mortgage-backed securities, and corporate bonds. As the graph below shows, the annualized pace is greater than at the 2008-09 financial crisis peak.
In addition to QE and the abundant liquidity it fortifies financial markets with, it is also keeping the Fed funds rates at zero percent. The graph below shows that the real Fed funds rate level is obscenely negative.
Read the full article here by Michael Lebowitz, Advisor Perspectives
