Email of the day on simultaneous monetary and interest rate tightening
Comment of the Day

December 17 2018

Commentary by Eoin Treacy

Email of the day on simultaneous monetary and interest rate tightening

In a mid-year commentary, which I cannot locate, you presented a strategy for coping with the customary October seasonal downturn.  Implementation of that advice will have saved subscribers many years of subscriptions.  Thank you for those invaluable comments.

More recently you have devoted much time discussing the dual impact of rising interest rates and Fed balance sheet reduction.  The attached article (a bit long) states that the US Fed, being excessively influenced by equity markets, but ignoring an already slowing real economy has tightened excessively and, because of lags in the effect of monetary policy, will not now succeed in reversing the economic downturn already underway.

Trying to second guess the Fed while anticipating an inevitable slowing economy is making portfolio management even more difficult than usual.

Eoin Treacy's view

Thank you for this kind email and I am delighted you are getting value from the service. There are two Fullerisms I have been ruminating on recently. The first is “monetary policy beats most other factors most of the time” The second is “the Fed has killed off more bull markets than all other factors combined”.

Here is a section from the conclusion of the article you included:

The Federal Reserve has pushed monetary policy too far. It makes sense that the market is rapidly pricing out future monetary tightening. There is a high probability that if the Fed raises rates in December, this will be the last hike of the economic cycle.

Even if no rate hike occurs, balance sheet reductions will still be running in the background, reducing excess reserves, putting further strain on the banking sector and perpetuating a deceleration in economic growth.

The Federal Reserve has already pushed too far.

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