Published May 6, 2022
Bull markets don’t die of old age. According to an oft used axiom, “they are murdered by the Fed.” The Federal Reserve has to get its policy just right in order to avoid killing the market. The problem is that getting it just right – like for Goldilocks, “not too hot, not too cold” – is akin to a fairy tale.
Coming to the end of a long-term bull market the Fed faces many challenges in carrying out its dual mandate of full employment and inflation control. Fed Chair Jerome Powell addressed this in his recent report on the vote by the Federal Open Market Committee (FOMC) to increase interest rates by 50 basis points, saying the Fed governors will continue to evaluate employment and inflation data before they commit to the timing and amounts of future raises.
Currently, inflation is running much higher than the Fed target rate of about 2 percent, yet its tools for fighting inflation are limited. With inflation running hot, the Fed has opted for a moderately aggressive interest rate policy, with more rate increases forecast. Such actions are challenging to the market and threaten economic growth. Without the rate increases, however, inflation will go unchecked.
Inflation can be a serious threat to the economy and economic growth, as history has shown. Runaway inflation, such as seen by Germany in the late 1920s and early 30s, can have serious social and political dislocation effects in a country. Revolutions have been fought over the price of bread. The resulting political instability has allowed demagogues to come to power.
Government spending is a strong contributor to inflation. The only thing the Fed can […]