Investors wringing their hands over whether or not the Fed will help “soften” any incoming blows to the markets and the economy…really don’t quite know this Fed.
The Fed is already there and will continue to be there. I’d argue too much so. Powell and company are making it quite clear; interests rates remain near an all-time low and the Federal Open Market Committee says it will continue buying at least $120 billion of bonds each month “until substantial further progress has been made towards the Committee’s maximum employment and price stability goals.” This means: more low rates for the foreseeable future, EVEN if inflation creeps higher, which under the circumstances it just might.
The concern is that with Uncle Sam upping minimum wage to $15/hour and offering $400 in unemployment benefits, inflationary pressures will begin to take hold. After all, if it costs producers more in labor to make a product, then those cost increases will be passed along to consumers.
Meanwhile, I’ve argue that inflation is already present in the stock market. After all, how do we really justify these current valuations? We can’t – except through the premise that the market will continue moving higher because the Fed wants it to move higher. Hardly a reason… but, nonetheless, still a reason.
Fed Risks Creating a New Asset Bubble
The real danger with an overactive Federal Reserve, is that if the fundamentals in the economy don’t “catch up” to the frothiness of the market, then we risk another asset bubble a la 2008. That bubble was a long time in the making and due to several factors including government’s desire to make sure everyone had a home loan, the banks’ desire to make more and more money on mortgage fees, and everyones’ belief that the market was diversified enough to help guard against any losses.
That didn’t work out so well.
We could face similar risks in 2021-22. The Fed, after all, can only do so much. And, if real growth doesn’t actually materialize, the Fed’s efforts will have all been in vain–and with serious consequences.
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