Federal Reserve Chairman Jerome Powell has spearheaded the most radical monetary policy in American history.

From zero percent interest rates to Quantitative Easing to Corporate Security Asset Purchases to various lending facilities, to subsidizing fiscal spending programs and deficits – The Fed’s resume is not one to be proud of. Under Powell the Fed has nationalized the equity and fixed income markets and has facilitated bubbles galore. The distortions are numerous:

• Price increases across asset classes: Price inflation is only warming-up, it is not going away given the monetary expansion we have suffered to date and the further monetary expansion that is coming to fund the $4-5 trillion in Biden spending on Infrastructure and Social/vote-buying programs. The equivalent of taxation without representation.
• Pseudo-asset classes: Does anyone believe The Fed will allow Bitcoin/crypto to survive with a digital dollar coming, or that NFT plays would exist were it not for incomprehensible policies such as paying people to stay home and gamble on pseudo-assets?
• “Through the roof” housing prices despite low labor participation: Housing prices are at record levels despite the civilian labor force participation rate near a record low.
• Record Public Debt to GDP levels: Public Debt to GDP stands at approximately 130% and is poised to go significantly higher from this point forward.
• Overvalued equity market: We have had multiple conversations with would-be acquirers who have chosen to remain on the sidelines rather than overpay knowing that valuations will ultimately head lower – especially Technology company valuations.
• Savers be damned: Good luck to Main Street savers and Wall Street fixed income investors given the near zero nominal fed funds rate, which of course translates to negative real interest rates.

The Fed taper is coming. The eventual nominal interest rate hike is a joke. The longer Powell and the Fed wait to taper (Powell is clearly campaigning for his job to be renewed in February rather than make the economic calls that need to be made), the more abrupt/steep the tapering process will be. We recommend that the Fed taper immediately. It is 100% illogical for The Fed to have ultra-easy policy as it relates to mortgages for example given the backdrop of an over-heated housing market. Stop all MBS purchases and allow mortgage rates and housing prices to find equilibrium. Do the same with Treasuries and allow yields to climb. Take interest rates up. To the latter point – who is the Fed kidding? With public debt at 130% of GDP and multi-trillion dollar fiscal deficits, it is not as though The Fed can take interest rates to 5% or more. Were that to happen Treasury would be required to default on one or more entitlement programs in order to service the interest on the public debt.

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