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HEALTH, WEALTH, AND HAPPINESS

June 16, 2022

Hi everyone,

By now you've probably heard the big news. The Federal Reserve at their meeting yesterday surprised many market participants with a massive increase in their benchmark interest rate, thereby tightening monetary conditions and a noose around the economy.

Despite this being terrible news for risk assets, the market reaction during the meeting and in the few hours that followed was quite positive. This is the unsurprising part; as Bloomberg's John Authers points out, the market nearly always goes up on Fed days. Yesterday's gains have now been erased as investors weigh the possibility of further rate hikes and more pain as Jerome Powell and the gang attempt to fight the inflation monster that they themselves created.

If the fact that Fed officials themselves sold their stocks shortly before embarking on this quantitative tightening "to avoid conflict of interest" is insufficient evidence of their heartlessness, the monetary policy statement, or more precisely the not-so-subtle differences between yesterday's policy statement and the previous one, should be confirmation of their culpability.

Silly button pushers

Unlike other central banks, the US Federal Reserve has what's called a dual mandate: they're responsible for both price stability and ensuring maximum employment. Yesterday's statement has made it crystal clear that protecting people's jobs (the latter) is not nearly as important as getting inflation under control (the former).

Referencing Authers' blog, here is the key shift in policy statements between last month and this:

This is the main problem, as I see it, with having unelected officials with unilateral power over our money, which is the very reason bitcoin was created.

To carry out their goals, it's known that the Fed has two main levers they can play with: interest rates and asset purchases. The latter lever, as we know, allows them to inject/extract money from the economy whenever they deem it necessary. The former is their way of undercutting free markets by lending money to financial institutions at minimal rates. 

When this rate lever is adjusted up or down, it essentially forces other institutions to respond in kind. It might make sense that rates should be lowered when times are tough and raised when times are good. Looking at the graph below and living the times that we're in now, however, makes it seem like they are simply not in a position to adequately make these sorts of judgment calls.

For the love of Pete, Powell, please stop playing with the damn levers!!

How I really feel

In retrospect, we probably all should have been suspicious that stocks were skyrocketing during a global pandemic that crippled the economy. I guess while it was happening, we were all too busy to take too much notice. 

Best regards,

Mati Greenspan

Analysis, Advisory, Money Management

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