I agree with your assessment of Powell's move and how it might be received in the short-term. However, over the next few months, it might also be seen as a pretty bad policy mistake. The reason being is as follows: what if inflation were already going to subside because it was all about undersupply all along (due to supply chain probl…
I agree with your assessment of Powell's move and how it might be received in the short-term. However, over the next few months, it might also be seen as a pretty bad policy mistake. The reason being is as follows: what if inflation were already going to subside because it was all about undersupply all along (due to supply chain problems and lack of foreign competition during Covid)? In that scenario, the tapering would be an unnecessary tightening that could cause trouble in the credit markets. After all, a whole lot of Americans are still out of work post-Covid and many lost benefits 6 weeks ago. If their spending habits dramatically change to the negative (not because of empty shelves but because they have no money), then the tapering will only make it harder for banks to lend to folks versus owning higher interest paying Treasuries.
Also, today's market generating information is telling us something. The 10Y yield is down 6bp from 1.60% to 1.54%. Why would that happen after a tightening event (i.e. tapering announcement)? Bond market is NOT forecasting inflation and it's fueling the mega tech stocks because they are long-duration bond-like proxies.
I agree with your assessment of Powell's move and how it might be received in the short-term. However, over the next few months, it might also be seen as a pretty bad policy mistake. The reason being is as follows: what if inflation were already going to subside because it was all about undersupply all along (due to supply chain problems and lack of foreign competition during Covid)? In that scenario, the tapering would be an unnecessary tightening that could cause trouble in the credit markets. After all, a whole lot of Americans are still out of work post-Covid and many lost benefits 6 weeks ago. If their spending habits dramatically change to the negative (not because of empty shelves but because they have no money), then the tapering will only make it harder for banks to lend to folks versus owning higher interest paying Treasuries.
Agreed. My assessment is 2-3 months as well.
Also, today's market generating information is telling us something. The 10Y yield is down 6bp from 1.60% to 1.54%. Why would that happen after a tightening event (i.e. tapering announcement)? Bond market is NOT forecasting inflation and it's fueling the mega tech stocks because they are long-duration bond-like proxies.