The Fed managed to achieve the biggest trick in the central bank’s manual this week: boredom.

After the most recent monetary policy-making meeting, comfirmed Plans start to cut $15 billion in bond purchases every month, making it hopeful that this part of the stimulus measures will be completely eliminated by the middle of next year.

In the context of strong inflation data, these plans are not surprising. It turns out that these data are even trickier than predicted by the most keen inflation experts.

The actions of the central bank have also been fully hinted in advance, eliminating any undue shock factors; the Federal Reserve usually likes to provide mild surprises, generous generous support of the economy, and then boost risk assets.In contrast, it doesn’t like unexpected hawkish tendencies, especially considering “Cone tantrum” In the market, it was released when it announced its intention to withdraw currency support in 2013.

But at his press conference, Federal Reserve Chairman Jay Powell poured more comforting lip balm, and put aside the talk of smoothly advancing interest rate hikes, saying that “it is appropriate to maintain patience.” , And implies that if the situation requires it-as HSBC puts it “a neat taper”.

The result is that Powell and the Fed are neither hawkish nor dovish, but somewhere in between. “Dowkish”, to be precise, is a word invented by Rabobank economist Michael Every.

“The irony is that being a bearer and saying that the reduction is about’risk management’ rather than taking Punch from a radical drunk, means that the Fed has produced the best result-the drunk The market-but the worst it can produce-the drunk market,” Every wrote. He added that this is “partial cancellation of pouring without real responsibility.”

Signs of drunkenness are everywhere, and as every barmaid knows (I have finished my time to pull a pint, although it is terrible), it is a good balancing act to expel drunken people from the premises late at night.

Currently, after-hours lock-up is still in full swing. On the same day that the Fed announced its change of position, the US blue chip S&P 500 index once again hit its 61st all-time high this year. according to Charlie Bilello of Compound Capital Advisors. There are still 17 times to break the record set in 1995.

We did not hear Joe Biden yelling at this (unlike anyone you know), but according to Charles Schwab, the year since he was elected President of the United States has been It proved to be the best first year for any president since 1932.

For the Fed, it is understandable that it is unwilling to raise interest rates or tighten too quickly in other ways. Allegedly, one-off factors continue to emerge to boost inflation, from wind shortages in Europe that help raise natural gas prices to soaring fertilizer costs that will cause food prices to rise next year.

But as Gareth Colesmith, Global Head of Interest Rates at Insight Investment, said, the benefits of raising the benchmark interest rate to solve this problem are difficult to discern. “Can they fix it? No, it’s not true,” he said. “They can cancel the stimulus measures, they can raise interest rates, but they need to raise interest rates instead of inflation. If you tighten too fast, you will crash things.”

In addition, once the supply chain bottleneck is indeed relieved next year, short-term inflation can easily turn into short-term deflation or even deflation, he added. Some central banks now seem to be delaying inflation, but the risk of excessive tightening is real.

All this puts the stock market in its best position for most of the past year and a half. But it laid the foundation for a further terrible hangover.

Robin Brooks, chief economist at the Institute of International Finance, said this “put the Fed in a real dilemma.” “The basic principle of downscaling is the same as in 2013: raising long-term Treasury yields to tighten financial conditions and prevent overheating. So worryingly, this did not happen, which increases the risk of more drastic corrections in the future.”

Deutsche Bank analyst Alan Ruskin also pointed out this week that “asset cycle booms related to currency excesses and other policy errors usually end in tears.” But he said that “compensation” may be delayed, partly because the company is burdened with ultra-cheap debt and can withstand rising interest rates better than in previous cycles, and partly because households are still flooded with excessive savings. “The short-term risk appetite forecast may be better than expected,” he wrote.

“The actions taken by the Fed in 2020 are deemed necessary… Have taught another generation of stock investors that the Fed will rescue them there and must buy every time it falls,” he added. “Even if inflation starts to rise, there are many people who believe that stocks are the best asset class to hedge against risks in the first place. It requires a weaker economy or better fixed-income alternatives (higher yields) to break the psychology of equity .”

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