We recently penned an article discussing the “moral hazard” fostered by the Fed’s ongoing monetary interventions. However, this story is fraught with zombies and the path to “Japanification.”
The Fed recognizes their ongoing monetary interventions have created financial risks in terms of asset bubbles. They are also aware that most policy tools are likely ineffective at mitigating financial risks in the future. Such leaves them being dependent on expanding their balance sheet as their primary weapon.
Such was a point they made last year, which bypassed overly bullish investors.
“… several participants observed that equity, corporate debt, and CRE valuations were elevated and drew attention to high levels of corporate indebtedness and weak underwriting standards in leveraged loan markets. Some participants expressed the concern that financial imbalances-including overvaluation and excessive indebtedness-could amplify an adverse shock to the economy …”
“… many participants remarked that the Committee should not rule out the possibility of adjusting the stance of monetary policy to mitigate financial stability risks, particularly when those risks have important implications for the economic outlook and when macroprudential tools had been or were likely to be ineffective at mitigating those risks…”
That was in January 2020. Just a couple of short months later, markets were in the worst drawdown since the “Great Depression.”
With Central Bank interventions, it is not what is “seen” that is important, but what isn’t.
We “see” the trillions of dollars of liquidity having positive effects on asset markets.
However, what most overlook is what is happening elsewhere in the economy.
We previously discussed how the Fed’s interventions made the top 10% wealthier while bypassing the bottom 90% of income earners.