Getting back to the subject of the op:
I could argue that the fed/fomc is pretty good at creating market crashes, and not so good at bringing us out of recession.
in 2007, the fed raised rates in an effort to prick the bubble in/of the housing market. They succeeded in creating the crash of 2008 wherein many large banking houses went bust, along with millions of borrowers who found that they owed more on their property than the property was worth.
Except, that never happened. The Federal Reserve didn’t raise rates in 2007 much less “prick any bubbles”. It’s not the Fed’s job to “prick bubbles”. We don’t have a Greenspan Federal Reserve. The Federal Reserve actually lowered interest rates 3 times in 2007.
https://www.federalreserve.gov/monetarypolicy/openmarket.htm
Two, the Housing Crisis or Great Recession of 2007-2009 wasn’t caused by the Fed; it was caused by the repeal of Glass-Steagall in 2000 which deregulated the banking industry. Glass-Stegall was a set of post Great Depression financial reforms intended to prevent another Great Depression. The repeal of Glass-Steagall which had successfully prevented banks from gambling with investor money for almost a century quickly led to a banking crisis and a near Great Depression 2.0.
It seems most likely that in keeping interest rates low, the fed encourages borrowing which causes bubbles. Then the fed raises rates to prick the bubbles and markets crash.
Except, there is no evidence of that; between 2003 and 2006 the Fed had been aggressively increasing interest rates as stock markets rallied. The Fed raised interest rate during that period, not to pop bubbles, but to contain inflation. Remember the definition of inflation, “too many dollars chasing too few goods and services”.
This from guys who make money by shorting the markets:
First, you should never believe guys who make their money from shorting the markets. They are infamous for “talking their book”, i.e. manipulating less sophisticated investors to their advantage. Two, the chart you showed isn’t a one to one correlation as asserted. Three, correlation isn’t evidence of causation.
The fed held rates low since the crash they caused in 2008
Actually, the Fed began lowering interest rates in 2007. And there is no evidence the Fed caused any crash, much less the Great Recession. The Federal Reserve didn’t cause banks to make risky investments in mortgage derivatives; banks did that all on their own. The repeal of Glass-Steagall which would have prevented those “investments” and the Commodities Futures Modernization Act of 2000 which allowed those “investments” set stage for what would become The Great Recession.
The irony here is that congressional Republicans and a Republican POTUS are setting the stage for Great Recession 2.0 by attempting to repeal Dodd-Frank: legislation implemented after the Great Recession to prevent another Great Recession.
Now this is really difficult for Republicans or self-described “conservatives” who are anything but conservative, because it’s antithetical to their ideology, but the truth is deregulation caused the Housing Crisis.
And now the want to "unwind"
No. Now they want a return to normalcy. They want moderate growth and low inflation.
The S&P 500 tracks the money supply close to a 1:1 correlation
Except it isn’t, and the chart is irrelevant.
As the money supply shrinks, what will the s&P do?
What the S&P does will depend on many things. Ceteris paribus, all things being equal, stock markets will continue to grow, but at a reduced pace, and inflation will remain at 2% or less.
The stated goal of the fed is to reduce their 4.5 trillion dollar balance sheet. at the rate of about 6 billion per month to get back to the pre 2008 level of 800 billion(seems to low?). As the treasuries they hold mature, they have been rolling the money over into new treasuries. To meet their goal, they will simply not buy new treasuries.
And?
Currently, sovereign debt is the 500 pound gorilla in the room.
Sovereign debt isn’t a problem now, but it could be down the road. We have many options. Unfortunately, this administration and this Congress seem unwilling to do anything to seriously address the issue.
If the fed ain't gonna buy more debt, then the us will find it difficult to continue business as usual.
True?
False, the US doesn’t need the Federal Reserve to purchase debt. US interest rates will rise, but will still be low by historical standards. We aren’t looking at double digit interest rates a la late 70s and early 80s. We are looking at a return to historical norms.
Should economic circumstances change, I'm sure the Fed will change their policies as appropriate. That's what they have done in the past and their is no reason to expect that will change. Just because they "ain't gonna buy more debt" today, doesn't mean they won't buy more debt a month from now or a year from now as circumstances change.
Ceteris paribus, it’s a return to normal. The great unknown is what this Republican Congress and administration will or will not do. That’s the greatest risk to our economy. The global economy is growing and the US economy is growing and has been for the last 8 years.
If congressional Republicans succeed in repealing Dodd-Frank we are looking at another Great Recession in 7 or 9 years. If Republicans cause a debt default, we are looking at a dramatic decline in the economy and stock market. What’s next depends upon what Republicans do or don’t do. I don’t have a crystal ball, and I don’t know anyone who does.
