Buckaroo! Why The Fed Won’t Be Able To Contain Inflation (Taylor Rule Suggests A Target Rate Of 23.30%, A Bridge Too Far)

by confoundedinterest17

The Federal Reserve has behaved like buckaroos! Why? Since the financial crisis, The Fed has left its enormous monetary stimulus outstanding for too long.

The Fed initiated asset purchases in a series of moves (aka, QE) culminating in Covid QE that has been barley removed. With The Fed’s stimulypto (and Federal spending), we have seen the S&P 500 index soar along with home prices.

Of course, this begs the question as to whether the stock market and housing market can withstand The Fed’s tightening plans.

A closer look at the S&P 500 index and the Case-Shiller National home price index under Biden. The S&P 500 has been declining since The Fed started their monetary tightening. But the Case-Shiller National home price index as of April ’22 was still soaring.

With inflation at a 40-year high, the Taylor Rule suggests a Fed target rate of … 23.30%. It is currently at 1.75%. That is an unrealistic target rate that The Fed will never do. It is, in fact, a Bridge Too Far.

How about the Taylor Rule using Core PCE? It is still 12.71%. Still a bridge too far!

Markets are conditioned to massive Fed stimulypto, so how will markets react to stimulus reduction?

While The Fed is intent on withdrawing SOME of the enormous monetary stimulus, they are still buckaroos. And Biden/Congress still want to distort markets by Federal spending such as the Build Back (Inflation) Better bill that Manchin has blocked … so far.