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How to prepare when the Fed moves to curb inflation

The amount involved in the Fed’s quantitative easing has been staggering. Back in 2008, the Fed’s balance sheet had assets of 820 billion dollars. They hit $4.5 trillion — yes, trillion — in 2015 and only dropped to as low as $3.76 trillion in the summer of 2019. With the coronavirus financial crisis, they’ve grown. spike again, to $8.9 trillion and maybe a little bigger before the spigot closes. Assets held by the Fed were more than 10 times its size in 2008, and bigger, as a share of gross domestic product, compared with any time since World War II.

Fed’s monetary stimulus measures come in total 5 trillion dollars during the federal government’s pandemic fiscal relief. Governments and central banks around the world are also involved in emergency relief spending. According to Chris Dillon, global investment specialist at T. Rowe Price, a Baltimore-based asset management firm, the total amount of global monetary and fiscal stimulus amounts to $25 trillion. This year, that flow is being reduced to a comparable drip.

It is extremely difficult to correct for the combined effects of quantitative tightening and rate hikes in real time. Stimulus cuts are too fast and the Fed could make it even more difficult for financial markets. It could cause a spike in unemployment and a slowdown in growth, sending the United States into a recession.

On the other hand, move too cautiously and the Fed could allow inflated inflation expectations to be embedded, making high inflation even more damaging. The last time that happened, when Paul A. Volcker was president of the Fed from 1979 to 1987, yes horribly high interest ratesunemployment skyrocketed and two Depression to remove high inflation from the national psyche.

Unsurprisingly, Mr. Powell said the Fed would need to proceed with “humility.”

Kathy Jones, chief fixed-income strategist at the Schwab Center for Financial Research, said the Fed’s mandate is fraught with risks. The bottlenecks in the economy can be eased if the coronavirus ebbs, which can solve part of the inflation problem.

Through the Fed’s control of funds rate and the ability to adjust The speed and types of securities it sells as it shrinks its balance sheet, the Fed can affect a variety of interest rates.

Even if the Fed manages to avoid a recession that leaves many out of work, the road ahead is unlikely to be smooth.

https://www.nytimes.com/2022/01/28/business/fed-inflation-stocks-bonds.html How to prepare when the Fed moves to curb inflation

Fry Electronics Team

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