Will The Fed Hike On Wednesday? Who Cares?
The Fed Has Already Lost Control Of The Long End Of The Yield Curve
The Fed’s monetary policy has been wrong since it kicked off QE in 2009. If the Fed holds rates steady on Wednesday, and if CPI continues to grow sequentially at a rate similar to August and September, then it is likely that the Fixed Income market will do the Fed’s work for it and lift yields at the long end of the Treasury yield curve. The Fed has lost control of rates at the long end of the curve and if the Fed is not careful, it will wish it never handed control to the market. If the above scenario plays out, the 10 year Treasury yield won’t simply climb to 5% and halt. It will absolutely overshoot.
To remedy this mess the Fed ought to hold rates where they are, perhaps even lower the Fed Funds Rate to 3% or so while simultaneously shrinking the money supply by dramatically accelerating its QT program. Thus far QT has only shrunk the money supply by approximately $1.1 Trillion after the Fed grew the money supply by an unprecedented amount between January 2020 and April 2022. During that period the money supply as measured by M2 grew from $15.3 Trillion to $22.1 Trillion. That incremental $6.8 Trillion represents M2 growth of more than 44%. The Fed is pulling the wool over investors’ eyes. It’s barely tightened on the QT front and real interest rates (Fed Funds Rate less CPI) are barely positive. All the while price inflation persists as yields climb. The Fed is not fighting inflation despite its rhetoric.