When Will the Federal Reserve Pivot? – Bitcoin Magazine
This is a transcribed excerpt of the “Bitcoin Magazine Podcast,” hosted by P and Q. In this episode, they are joined by the Bitcoin Magazine Pro team to talk about the Federal Reserve’s policy decisions.
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Dylan Leclair: Obviously everyone’s favorite question and no one has the answer is, “When Pivot?” Luke Groman said August [2022], which I think is – I really respect Luke and his opinions on things – but I think it’s a little early. It is aggressive; it is very aggressive.
I think the train is coming off the rails really fast here. Sam [Rule] and I’m kidding. We send each other financial charts every day and we have yet to send, to see a great chart over the last month with all this deterioration in data and public sentiment.
What are your thoughts on the rest of 2022 and maybe 2023?
TXMC: The Liquidation of Treasury Securities. It’s very interesting because it outlines the playbook, which allows inflation to run hot. Suppress returns so that they are below inflation, and over time the debt will sort of dissolve.
But the problem that they [the Federal Reserve] has come across now, as you alluded to Dylan, is inflation has become too high. Right? It can’t be sitting at 8%, 9% year over year, and part of the reason it’s that high is because things are out of the Fed’s control at this point: supply chain constraints, China’s zero-COVID policy, and Russia invading Ukraine . All of these have worsened. What really started in 2020, obviously fiscal stimulus created a lot of demand, and after we reopened the economy, that didn’t help either. Inflation has gotten way out of control for them, so I think the playbook of “Oh, let’s just let it go a little steamy,” as Janet Yellen has even said in the past. We were open to the idea before she became finance minister.
I think back when she was running the Fed, she said something to the effect of: It’s even okay for us to let inflation run above the target for a period of time. As long as the economy seems to be doing well. You’d think maybe they do to some extent here. Maybe they don’t want inflation to suddenly disappear down to 1% because that helps to eliminate the debt, as you mentioned.
If you look at it by quarter, it goes up to 136, but my chart was an annual average. You can see that it goes up to approx. 130 or so, and it has come down to approx. 124,120 (5% debt to GDP). So it has worked to some extent. But because it’s so high and because there are some serious structural problems in the economy that can keep high costs stubborn, it’s driving a lot of social unrest, just simmering under the surface. There is flat rebellion in certain countries, but here in the US it is still brewing just below the surface. It’s obviously number one for voters in a midterm election year. You and Sam are like looking at all this data and it just keeps getting worse and worse and you’re absolutely right.
It feels in some ways like they are just trying to keep the wheels on the bus until we get through the election. Because then afterwards they can all kind of relax and we can just let the economy deteriorate because they don’t want to talk about stimulating the economy or helping cover the costs of working class citizens losing their jobs because they caused so much economic stress before we at all come to the election.
They are in a very tough position here. There are many signs that inflation may be lingering. It may not come down, back to 2% or 2.5% anytime soon. Maybe it stays elevated at 4%, 5% or 6% or worse.
If so, what does it look like when the Fed has to turn a blind eye in that environment? When people are forced to spend significantly more on non-discretionary things than they did in the past: shelter and food and gas to drive to their jobs. How does it look for the economy?
If they can’t spend freely and drive expansion and speculate and do all the things that really produce an exciting bull market for market players, how do we create? In an environment of stubbornly high costs for things that people have to pay for, I don’t know that we have a good answer for that.
It is certainly not a newer model for that particular environment and certainly not in the quantitative easing era and every time in the past. When is the Fed going to swing? When they swung in 2020, which produced the fun, absurd, live market for so long, the CPI was at 1.5% and the market fell 35% in a single day.
So the environment was quite different. There was much more panic. The future was even less certain than it is now and inflation was significantly lower, but that is not where we are now. I believe that none of the outcomes available to them are particularly attractive at this point.
Check out the full episode to hear the rest of the conversation!
