The Fed Is Between a Political Rock and an Economic Hard Place

Black Friday was a black and blue Friday as US stock markets saw their sharpest declines since April 2020.

The selloff was spurred by a new COVID variant and fear of new lockdowns. The markets recovered on Monday, but the sudden stock dip was telling.

Peter Schiff pointed out that another economic shutdown would require more stimulus and that would mean an end to a taper that barely got started. In fact, it would probably require an even bigger round of quantitative easing.

I don’t think the Fed simply saying, ‘We’re going to maintain the stimulus we have now,’ — that ain’t going to cut it. When you have a drug addiction, you build up a tolerance. And I don’t think the Fed can really stimulate the economy again by maintaining the level of stimulus that is already in place. The markets kind of get used to that and expect that stimulus, so I don’t think it really acts as a stimulus more than a crutch. And I think if we need another phony stimulus the Fed is going to have to up the dosage.”

In fact, as Wolf Richter pointed out on WolfStreet, the little stock market swoon on Black Friday already had “the crybabies on Wall Street” coming out in force “clamoring for the Fed to end the tapering of its asset purchases, and to push out the expected interest rate hikes into distant infinity and to maybe even re-start QE all over again before they even ended it.”

Because, you know, stocks aren’t ever allowed to drop, not even a little bit off their ridiculously inflated highs.”

Richter said a drop in the market was bound to happen. After all, it doesn’t take a very big pin to pop a bubble.

But the Fed has another problem — red-hot inflation.

Powell and Brainard, along with just about every other Fed governor have acknowledged it: Raging consumer price inflation that has now spread broadly across and deeply into the economy, filtering into services such as rents that are unrelated to transportation mayhem and production shortfalls in Asia. Rents, accounting for about one-third of CPI, are just now getting started to flex their muscles in the inflation indices. And the mood of consumers has soured.”

The transitory inflation narrative has unraveled. There is no reason to believe rising prices will suddenly stop rising, especially considering that the central bank still has its foot firmly pressed down on the money printing pedal. Despite the “taper” that started in November, the Fed managed to add $126 billion to its balance sheet.

What is a central banker to do? The Fed can fight inflation by tightening monetary policy and risk a massive stock market crash – and it clearly wouldn’t take much. Or, it can just let inflation keep on running and risk a genuine dollar crisis.

Wolf called inflation a “political bitch.”

In a sense, the reaction to the stock market selloff on Wall Street was a bit amusing, as Wolf wrote.

The clamoring by the crybabies on Wall Street for relief from the Fed to soothe this insufferable pain of markets dropping a little from their ridiculously inflated levels is just hilarious and provides great amusement on this Black Friday when people are supposed to try to prop up the economy by splurging with borrowed money on imports from Asia.”

But the humor may not last as the Fed comes face to face with the reality of inflation and has to make a choice to fight or flight.

Lest you forget, Paul Volker had to hike interest rates to 20% in order to tame the inflation of the 1970s. How do you think the “crybabies” on Wall Street would like them apples?