Did Powell Let the Fed Put Expire?
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A week before the January 26th Fed policy meeting, I asked Instability or Inflation, Which Will The Fed Choose?
Liquidity is the lifeline of markets and the Fed, directly and indirectly, manages its flow via quantitative easing (QE) and zero rates. With inflation raging, the pandemic subsiding, and economic activity normalizing, the Fed is keen to start reducing liquidity via higher interest rates and reductions in its balance sheet. The purpose of normalizing monetary policy is to bring inflation down. However, the removal of said liquidity could prove problematic for stock prices, especially if done more aggressively than expected.
Per the article:
The Fed is making it clear it wants to reduce inflation. It is also telling us it will ensure financial stability. Sounds like a good plan, but walking the narrow tightrope successfully by achieving lower inflation without destabilizing markets is an incredibly tough task.
I think the odds of success are poor. As such, we must carefully consider which goal it will prioritize when push comes to shove.
Deciphering Fed speak is tedious but given the Fed's new fight on inflation and the considerable impact it can have on markets, it is worth getting a little wonky. Please stick with me as I dissect Powell's insightful press conference and what it may mean for monetary policy and inflation. Equally important is whether Powell is willing to sacrifice the Fed put and leave investors without the support they are accustomed to.
The following LINK provides access to the press conference I will discuss throughout this article.