Fed and Treasury steer their ship toward unsinkable iceberg

This past week we got to observe Fed Chair Jerome Powell and the US stock market and the US bond market do everything I said they would do in their complicated shuffle of ships-and-icebergs:

“I’m sure many helium-headed stock investors believe the lilly-livered Fed will turn tail and run from its goal of letting inflation rise as soon as bonds begin to clobber stocks more seriously…. I believe the Fed is more committed than ever to raising inflation as it has been saying it wanted to do for years.”

“Stocks in Bondage but Fed Not Fazed“

While bond yields had already begun to rise and compete against stocks, the Fed stayed the course, iceberg dead ahead. As a result, long-term bond interest rose even more because the Fed did nothing to jawbone the idea of increasing its bond-buying QE to take interest rates back down (which it accomplishes by purchasing US government bonds from banks to take them off the market, putting them on its own balance sheet).

You see, the Fed is — I believe — caught in its own catch-22. Usually, to lower interest (in order to stimulate the economy and hit the higher inflation number the Fed says it is targeting), the Fed would buy more bonds; however, buying bonds and adding them to its balance sheet tends to create more money in the system, and the bond market is already afraid of rising inflation because much of the new money is now going into the hands of average people. (This game only worked when all new money was going into the stock market.)

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