On my mind: The long and winding road

Seeking Alpha/Sonai Desai-Franklin Templeton/2-15-2022

“Investor attention is now focused on the immediate challenge that central banks face in recalibrating policy against rising inflation. That’s a crucial issue. But we should pay even more attention to the perilous multi-year adjustment process that lies ahead, during which markets will have to relearn to price risk without the central banks’ ever-present safety net.”

USAGOLD note: Though we do not in any way wish to challenge Desai’s warning, we at the same time remind our readers that the last time the Fed launched quantitative tightening in 2017, it was forced to throw in the towel and resume Treasury and mortgage debt purchases in 2019. That’s not to say that history will repeat this time around. There was very little inflation to speak of in 2019. As Desai notes, “Markets seem to still be clinging to the mindset of the last ten years, when inflation was stuck at low levels and the Fed could afford to prioritize asset prices without compromising price stability. But the world has changed. High inflation has become a prominent economic and political problem, and the Fed cannot ignore it.”

Federal Reserve Balance Sheet
(Millions of dollars)

Source: tradingeconomics.com