The FOMC released its latest monetary policy statement on December 15, 2021. The Fed will increase its taper, while still maintaining its target interest rate near zero.
The increased taper just means that the Fed will increase its balance sheet at a slower pace. It is decelerating the pace of monetary inflation. If it continues on this path, then its current quantitative easing (or whatever term they’re using) should come to an end in the spring of 2022.
Jerome Powell said it wasn’t appropriate to change its federal funds target rate until the balance sheet expansion is over. In other words, once the Fed stops inflating, then it might slowly increase interest rates.
Also interesting is that Powell said the Fed is no longer shooting for price inflation over 2%. If that’s the case, then they should probably be slamming on the brakes faster than they are now.
Since the CPI is at almost 7% year-over-year, the Fed should probably stop all monetary inflation right now if they want to bring it back to 2%.
Of course, the Fed has to balance its concern of higher inflation with trashing the economic boom. If they are too aggressive in stopping inflation, we could see a quick popping of the Everything Bubble.
This is presumably why the Fed is speeding up its taper while not stopping its monetary inflation completely at once. They didn’t want to spook the markets.
Stocks went up after the Fed decision, while gold went down. But things reversed on Thursday with gold going up and a more mixed stock market. The Nasdaq was down big on Thursday.
While stocks have been somewhat volatile lately, they are still somewhat holding up. The indexes still aren’t that far from all-time highs, even with the volatility.
We may not see the big crash of the Everything Bubble until we see an inverted yield curve. In order for this to happen, we are going to have to see short-term rates go up a bit. It is hard to have an inverted yield curve when short-term rates are near zero.
If and when we get an inverted yield curve, it will still take some time. There is some lag between this and when the downturn actually happens. So we could still be a couple of years out from a major downturn.
As I’ve said before, it is especially hard to tell right now because we did have an inverted yield curve in 2019. The very brief recession (if you call it that) that came on in March 2020 is blamed strictly on COVID and the lockdowns. And the Fed started creating new money like crazy before the downturn even happened.
So it is impossible to say if we need another inverted yield curve in order to see the next recession. But if we do, then we’ll have to wait a couple of years.
This isn’t to say that stocks will keep roaring. It’s also not to say that some sectors won’t see a major fall.
I am starting to think that so-called cryptocurrencies will be the canary in the coalmine. These are the ultimate speculation of the last few years, and I think they could easily fall before stocks and real estate fall.
They may all go down in tandem, but it wouldn’t surprise me if cryptocurrencies lead the way and precede the fall in the big asset classes.
I don’t recommend any heavy shorts against stocks right now, as there might still be legs to run this bull market a bit farther. I am not heavily betting on stocks right now, but I am also not heavily betting against them.
If we get an inverted yield curve in 2022, then I will consider taking some bets against stocks.