The Cowardly Hen Pecked Fed

David Einhorn: We Have War, Pestilence, Famine, And Plague

But is the Fed doing whatever it takes or is it just talking tough, while in reality implementing a weak initial response that could exacerbate the problem?

We think it is clearly the latter. In the Fed’s Monetary Policy Report to Congress from February 2021, it highlighted something called the “balanced-approach (shortfalls) rule” that is designed to calculate what an appropriate Fed Funds rate would be given various inputs including unemployment and inflation. Currently, this would indicate an appropriate rate of about 7%.

There is endless debate about raising interest rates by a quarter percent or a half percent. With the Federal Funds Target Rate still at 0.25%-0.5%, this feels like trying to figure out whether it’s best to clear a foot of snow from your driveway with a soup ladle vs. an ice cream scooper. This certainly isn’t doing whatever it takes.

The market is beginning to price in its doubts about the Fed’s resolve and likely failure to return inflation to its 2% target. Even as the Fed resets the market’s expectation to a faster tightening cycle, inflation expectations are increasing and long-term bond prices are falling.

The Fed should have hiked rates to 3 percent or 4 percent in March. Then depending on market reaction, unleashed its quantitative tightening in the following months. Instead, the Fed is slow walking rate hikes because it fears making the market mad. It has abandoned both of its mandates and instead worries about stock prices. The Fed is destroying its credibility in the process.

If the Fed slow walks hikes and QT and the market tanks this summer, what will the Fed do if inflation is still 6 percent in October? Stop the hikes and QT? They can't if they want to prevent a double-digit CPI. They'll have to keep hiking and doing QT all the way through next year. If instead they hike a huge amount and shock the market, it will cause a panic, but it will also restore Fed credibility because the market won't ever think the Fed can't, or won't, suddenly hike rates again. The worst case scenario for Fed credibility is they give up before hitting 2 percent on the Fed funds rate again and abandon maximum QT after a few months. That will further harden the idea of a weak, cowardly Fed that can no longer fight inflation because it'll make the stock market upset. One way or another, the market will force the Fed into crashing financial markets because runaway inflation is worse than a deflationary panic triggered by rate hikes.

Adding to this looming central bank policy disaster is an entire generation of investors who have no idea how markets function. Many investors with decades of experience have also forgotten how markets worked before the Fed was there back stopping every correction and bear market in stocks. On the whole, I see little evidence that investors have learned anything from the past four months. Most think this is yet another dip to buy. Even if they are correct in betting on Fed weakness, they don't know how to bet on it. No matter what happens a disaster is coming for the stock market.

AS I PASS through my incarnations in every age and race,
I make my proper prostrations to the Gods of the Market Place.
Peering through reverent fingers I watch them flourish and fall,
And the Gods of the Copybook Headings, I notice, outlast them all.

We were living in trees when they met us. They showed us each in turn
That Water would certainly wet us, as Fire would certainly burn:
But we found them lacking in Uplift, Vision and Breadth of Mind,
So we left them to teach the Gorillas while we followed the March of Mankind.

We moved as the Spirit listed. They never altered their pace,
Being neither cloud nor wind-borne like the Gods of the Market Place,
But they always caught up with our progress, and presently word would come
That a tribe had been wiped off its icefield, or the lights had gone out in Rome.

With the Hopes that our World is built on they were utterly out of touch,
They denied that the Moon was Stilton; they denied she was even Dutch;
They denied that Wishes were Horses; they denied that a Pig had Wings;
So we worshipped the Gods of the Market Who promised these beautiful things.

When the Cambrian measures were forming, They promised perpetual peace.
They swore, if we gave them our weapons, that the wars of the tribes would cease.
But when we disarmed They sold us and delivered us bound to our foe,
And the Gods of the Copybook Headings said: “Stick to the Devil you know.”

On the first Feminian Sandstones we were promised the Fuller Life
(Which started by loving our neighbour and ended by loving his wife)
Till our women had no more children and the men lost reason and faith,
And the Gods of the Copybook Headings said: “The Wages of Sin is Death.”

In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: “If you don’t work you die.”

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.

As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool’s bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!