A new era for the Fed kicks off today. Gone is the era of monetary policy for the sake of the economy, guided by principles of economic balance in the face of shifting data.
Fed 2.0 is guided by three factors:
- Global monetary policy, primarily concerned with the BOJ and ECB
- Politics
- Survival
Global monetary policy: The Fed knows the unsustainable nature of allowing other developed countries to borrow at zero interest rates while the United States pays ~2%. Either the rest of the world needs rates to move up or the U.S. has to bring rates down. It seems the Fed has decided today that the rest of the world isn't budging.
Politics: The Fed doesn't have any friends in Congress and especially The White House. Back against the wall, they have to bow to political pressure.
Survival: If the Fed doesn't do what our political leaders insist upon, it will be compromised to the point of what will essentially be dissolution.
What does Fed 2.0 mean for the financial markets?
- Radical volatility in everything from government debt to equities
- The inability for the Fed to be effective when needed, such as in a recessionary period, without resorting to drastic measures that will properly absorb the radical nature of the volatility in the Fed 2.0 financial markets
It's really as simple as that. The function of the Fed has permanently changed. To expect the nature of the financial markets in reaction or in proportion to this change to remain constant is foolish and naive.
Adjust expectations for everything accordingly.
