FOMC: No Way Home

Markets are mixed as investors await the Fed’s December minutes due out this afternoon. Bulls, fingers crossed, are hopeful the minutes will shed light on the Fed’s plan to reduce inflation (aka the Grinch who stole QE) without ravaging stocks. Bears, fresh off their it-ain’t-transitory victory lap, are wondering whether their time has finally come.

To understand where the rubber meets the road, we turn to the 10Y.  Easily subdued over the past year by the Fed’s trillions in hush money, it might soon become reacquainted with the concept of price discovery – if the Fed doesn’t lose its nerve.

We know the Fed is nervous because they are finally speaking out about that pesky second mandate: price stability.  Founded in 1913, the Fed had no such mandate until the 1977 Reform Act, passed in response to debilitating stagflation, called into question the conduct of monetary policy.

The act directed the Fed to ”maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote the goals of maximum employment, stable prices, and moderate long-term interest rates.”

Pretending that inflation wasn’t rising didn’t go over so well. Neither did replacing the 2% PCE target with a target range. And, assuring folks that inflation was transitory (a term Powell never actually defined) has literally failed the test of time.

The problem, of course, is that if price discovery rears its ugly head interest rates might recouple with inflation. This wouldn’t matter so much if we only had a few trillion in debt. But, with debt slated to top $30 trillion in the next few months, the Fed faces a very big problem.

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