Why ‘they’ will never admit to ‘this’?

This ‘Wall Street Journal’ article is so familiar. As the Federal Reserve meets to raise interest rates, such a chorus always rises, no matter how ill-informed it is. Will the Federal Reserve trigger a recession becasue its rate hike will invert the yield curve? Will the Federal Reserve cause the stock market to crash?

It is all the Federal Reserve. There is one sliver of truth to that. It is and it has been the Federal Reserve. They set up the bubble with their extremely lax monetary policy – rates that remain too low for too long. Bubbles form and bubbles always burst. There has to be some trigger. The Federal Reserve’s belated tightening is the most obvious choice.

So, it is always the case that monetary policy normalisation causes the stock market to crash. Abnormal monetary policy – rates that are too low for long – causes bubbles to form and then they have to crash.

It is far easier to blame the Federal Reserve for causing asset prices to go down that make the wealthy feel poorer rather than blame oneself for ignoring risks and letting asset prices move too far ahead of and away from fundamental or blame fundamentals for keeping the punchbowl always topped up, no matter how ‘rowdy’ the party is.

This tweet captures the above well:

Let’s Be Clear. Many suggest recessions happen due to Fed tightening. Incorrect. Recessions happen AFTER bubbles created by extreme Fed loose policies are blown to be systemic. Recessions happen due to tightening TOO LATE. [Link]

Humans are reason-able. That is, we are capable of reason but as has been the case from the time we began to use ‘reason’, we have applied it to the cause of supporting our ‘un-reason’ or our prejudices.

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2 thoughts on “Why ‘they’ will never admit to ‘this’?

  1. Hi Anantha, what in your view should be the right higher level of US Interest rates at this juncture and consequently the level of interest rates in a developing, higher inflation country like India? Also what do you think would be the impact on the global economy and especially EM’s like India if rates were to go up 1.5-2%? We are already at 8% on the 10 yr G Sec in India and the rates seem to be headed higher even without the nudge from higher US interest rates?

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    1. In the US, the Federal Funds rate should be at least 3.0% and the 10Y UST between 4% and 5% at the minimum. In India, the G-Sec 10Y yield at 8% is not particularly high. A shade high. EM, in any case, have to brace for turbulence.

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