The Fed’s Evolution From Independent Agency to Treasury Subsidiary
We recently wrote that weening the equity market and Americans off of easy money will be difficult. We expect The Federal Reserve to march in lockstep with Congress and Treasury rather than act as the independent check on Government the Fed was meant to be. Thus, we expect monetary policy to remain loose for the foreseeable future in the face of: 1.) a weak labor participation rate (61.4% in January, down from 61.5% in December and down from 67.2% 20 years ago), 2.) rising Treasury yields and 3.) forthcoming fiscal “stimulus” marked by a $1.9 Trillion round in Q1 and another $1-2 Trillion for “infrastructure” likely to come in 2H 2021. We expect the Fed to ramp up Treasury bond purchases to force rates down. Perpetual QE and debt-funded fiscal “stimulus” will cause further asset inflation. It is difficult to estimate when the Fed may apply the brakes. Our view is that it will not be Powell’s decision to raise rates. Rather, the suggestion or perhaps more accurately the “instruction” to Powell will come from Treasury Secretary Yellen. It is at this point that the Federal Reserve will have become an informal branch of the U.S. Treasury. Click “read more” to view the related charts.