Jim Grant: The Fed Is Playing With Fire

Dallas Federal Reserve President Robert Kaplan has been one of the more hawkish Fed members. On Aug 11, he said the Fed should announce a quantitative easing taper in September and begin slowing asset purchases in October. But two weeks later, Kaplan backed off that assertion, saying that with the surge of COVID-19, he was open to adjusting his view. In an interview on CNBC’s “Squawk Box,” financial analyst Jim Grant explained why the Fed is playing with fire.

In an earlier interview with Barron’s, Kaplan said, “the unintended side effects of the asset purchases are starting to outweigh the benefits.” This is a bit of an understatement. Grant categorized quantitative easing as a “net harmful policy.”

We’re talking about the risks of COVID; how about the risks of unlimited QE?”

The Federal Reserve is gearing up for its annual Jackson Hole meeting. They have titled the gathering “Macroeconomics in an Uneven Economy.” Grant said he would title it “Gasoline on Housefire,” or “Hoses in a Hurricane.”

Because $120 billion dollars a month [in asset purchases] in an economy that is bounding and running with good health – the stock market is at all-time highs, 4,000-year lows in interest rates, and on and on – you wonder why is the Fed still in crisis mode?”

Indeed, even as the markets speculate about the possibility of a Fed taper, the central bank continues QE infinity it launched at the beginning of the pandemic. Every week or so, the balance sheet climbs to a new record. Meanwhile, pundits obsess over COVID or if Fed Chairman Jerome Powell will appear in Jackson Hole in person.

But the biggest thing to me is the persistence of this unexamined premise the Fed must be on full ahead, flank speed at all times. Why do we need this? Why? Why?

According to the Goldman Sachs Financial Conditions Index, financial conditions are at the “easiest” level since the gauge was created in 1984. Stocks are significantly overvalued. And Grant says interest rates in the bond market are at 4,000-year lows. He has gone as far as to say the threat to life and limb from the COVID-19 Delta variant is far less than the risk of continuing this extraordinary Fed monetary policy.

Grant emphasized that these policies have consequences.

The bond market and the Fed alike are betting everything on this idea that these unique policies will not be inflationary, and to the extent that they are inflationary, the inflation will be ‘transitory.’ All this is seemingly absorbed without dissent. Certainly, there’s no dissent evident in the bond market. But what if that’s not true? What if this inflation, which is no longer a theory but a fact, what if this is persistent? The entire financial world dangles by the thread of these ultra-low interest rates.”

Grant said he didn’t mean to compare life and limb literally with the adverse consequences of this “uniquely reckless set of economic policies.”

But certainly, human health is not unrelated to the state of our economies and to the state of our finances. I say the Fed is playing with fire.”