Understanding the Fed’s Latest Moves
In the past the Fed lowered interest rates to stimulate the economy. With rates still extremely low, that option is no longer available.
Raising interest rates won’t stop inflation either. With inflation where it’s at today, there’s no way the Fed will raise rates higher than that. The Fed know it’s meaningless to raise rates to combat inflation.
The reason the Fed is doing this is to create the impression its strategy is working (what people perceive is the reality in their minds).
So, what’s the Fed really doing? It’s issuing the threat of quantitative tightening (lowering the money supply) in order to battle inflation. This is what people need to be looking at. This is also what is driving down the stock market, not the increase in interest rates.
What the Fed is doing is trying to talk down inflation while it offers up a few interest rate hikes to give the impression it’s working. If the Fed actually followed through and cut the money supply, the stock market, real estate and cryptocurrencies would crash much further than they already have.
The point is, the threat of tightening is probably going to be just as effective of putting it into play.
As to the how, the threat of reducing the money supply is what will drive down inflation because of how much money Americans have in the stock market; they’ll lower spending and prices will drop.
If this works out how I believe it will, we’ll see inflation rates continue to drop in the months ahead, preparing the way to the Fed to buy up mortgage bonds, and possibly corporate bonds in order to stimulate the economy.
If the Fed were to tighten the money supply in a period of falling inflation, it would crush the economy.
The bottom line is, fear is really the only tool available to the Fed, and they’re going to continue to use the threat of tightening to drive down inflation, so they can once again create money out of thin air.
Concerning the why of this, the Fed has lost a lot of credibility in recent years, and if it can give the impression it has successfully lowered inflation while soon afterwards stimulating the economy once again, most people will forget the Fed is the one that created the problem in the first place. End the Fed.