The Federal Reserve has made an enormous mistake and the stock, bond, currency, and commodity markets are paying the price. Moreover, the Fed is the problem, and they do not know it.
In August 2020, the Fed reached a conclusion centered on the assumption that inflation was too low. The Fed then changed monetary policy based on an untested theory – flexible average inflation targeting – with a goal of increasing inflation “moderately above 2 percent.”
The Consumer Price Index (CPI) hit nearly 8 percent before that Fed actually raised interest rates – its “primary tool for adjusting monetary policy.”
As former Federal Reserve Chairman Ben Bernanke wrote, “the Federal Reserve’s objectives – its dual mandate, set by Congress – are to promote a high level of employment, and low, stable inflation” (Emphasis added). The Fed failed catastrophically in one-half of its two mandates.
In June, Fed Chair Jerome Powell told the Senate Banking Committee that the Fed needs “compelling evidence” that inflation is falling before interest rate hikes slow after ignoring “compelling evidence” that inflation was well-above its 2 percent target.
The markets have lost confidence in the Fed. As a result, the S&P 500 index lost 8.3 percent in June and has had its worst start to the year in decades.
Few markets have been spared. The yield on 10-year Treasury securities have risen from 1.52 percent at year-end to roughly 3 percent after hitting nearly 3.5 percent in mid-June. High yield (“junk”) bonds have soared to 8.88 percent from 4.35 percent at year-end. These massive rates of change suggest that the people in charge of monetary policy should no longer be making decisions.
A barrel of oil was trading around $105 at month-end from roughly $125 four weeks ago, however, oil is still up more than 40 percent year-over-year. Copper is down more than 20 percent, cotton dropped nearly 30 percent, and natural gas fell 16 percent in a matter of weeks as the global economy slowed.