2021-12-20

The Biggest Mistake the Federal Reserve Can Make

The Federal Reserve has made mistakes in the past and they will make more in the future. They can recover from their mistakes by reversing policy, but there is one mistake that will remove this ability.

If the Federal Reserve gets nervous about a declining market and shifts dovish here, oil will take off. The mistake won't be evident immedialte because it'll work at first, and they will come back hawkish again when inflation expectations climb to new highs, and that will seem to work too. However, they may have finally trained the market that if the stock market is falling, buy crude oil and gold to profit when the Fed eases. This will trigger rising inflation and inflation expectations and send stocks lower. The Federal Reserve will be pinned because easing will trigger an inflationary spiral. Not hiking will collapse stocks and eventually drag down oil and (probably) gold.

Will the Fed let history repeat and crude starts a waterfall decline, or does this pattern break (crude rallies to new highs) because the Fed intervenes. Or has the Fed already made this major mistake and investors truly do not believe the Fed will stay on the sidelines for any signficant amount of time?

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