[quote=deadzone]Have you looked at the chart of the Fed Balance sheet? [/quote]

Yes, and while that chart is certainly concerning, I don’t share the belief that that chart proves the fed caused all the inflation we are seeing.

[quote=deadzone]
If the Fed policy doesn’t control everything then why do the financial markets literally move based on Fed action (or inaction). Do you ever watch CNBC or other financial news?
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Sorry, I just find this argument to be, “Everyone else believes this, it must be true.” Which to me is not a reason to go along with the crowd, but a reason to step back and question the wisdom of this view.

[quote=deadzone]
The Free money given away by the US Treasury for Pandemic relief was because the Fed printed trillions of dollars and purchased US Treasury bonds. If it were up to a free market, or without Fed money printing, those trillions of pandemic giveaways couldn’t have occurred.
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hmmmm…. I don’t think I agree. My guess is that fed buying US Treasuries helped the US govt. but I think the US govt. probably could have floated a lot of bonds without the feds help. They might have had to pay a bit more interest, but I’m unconvinced that without the feds QE policy the US govt. wouldn’t have been able to give away all the money they did. (Or least close to what they did.)

[quote=deadzone]
But you are right it is impossible to know exactly how much of the inflation is caused by Fed money printing (i.e. QE) compared with the other factors.[/quote]

So, if you really mean what you say, that we can’t know how much inflation was caused by the fed, then you have to agree that maybe they aren’t nearly as effective as people claim. If we don’t know how much inflation was caused by the fed, we probably also don’t know how much inflation we are seeing is from fiscal policy, supply shortages, Ukraine war and companies reevaluating their pricing strategies. And if that’s true then maybe it’s time to admit that maybe, just maybe, the fed really doesn’t matters all that much. (And that’s my point.)

[quote=Rich Toscano]I do think they matter. More than you seem to think they matter anyway.
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Well, don’t get me wrong. I’m not really arguing that the fed doesn’t matter, more I’m questioning if they are as important as general wisdom says they are.
[quote=Rich Toscano]
– Supply chains and the war — federal govt stimulus

– The above two thoughts don’t actually really address the question of whether the Fed matters, though. Which is to say — it doesn’t really matter what caused the inflation… the Fed’s job is to make the inflation go away. Or put another way (and Jpow said this himself) – supply is what it is, and the Fed has to calibrate demand to that supply in order to get inflation to target.
[/quote]

That’s an interesting way to look at it. I guess what I’ve been wondering is how effective is the fed? We had bubbles before the fed was around and we still have bubbles with the fed. Maybe bubbles happen and the fed has fairly little impact on them. Maybe fiscal policy has a much bigger impact than fed policy. Keep in mind that most fed policy is much more reactive than proactive.

None of that is to say the fed is completely helpless, More to say that the fed’s tools are slow to take effect and the power of those tools is for the most part much more limited than people currently think.

[quote=Rich Toscano]
– So, if you think the Fed doesn’t matter, that’s the same as saying that they can’t – or won’t – reign in demand. I disagree on the “can’t” — they can jack up rates until they cause a recession, if need be. The “won’t” is more arguable but my view is that they really are committed to fighting inflation.
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Just to clarify, I don’t think the fed doesn’t matter at all, or that I think they can’t or won’t try to stop inflation. More I wonder if this wave of inflation was caused by factors other than the fed policy why do we think fed policy will be what matters to stop it? And assuming it does go away in a year or two, how will we know that it was the fed that was responsible for stopping it? If forces outside the feds control, (ie pandemic stimulus, supply chain disruptions, war in Ukraine) all reverse and inflation dies out, how will you know how effective the fed was?

[quote=Rich Toscano]
– Also, I would argue that they’ve already proven they can make a difference. My view is that we’ve had a raging equity bubble going, and it’s probably in the middle of bursting, and you can more or less trace the beginning of that bursting exactly to a big pivot in Fed policy.
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I’m not sure I’d agree we’re in an equity bubble, but I would argue equities went down because the equity markets believe the fed is super important. I don’t argue that an awful lot of people do believe the fed is super important. (Actually, my point of this thread was to say, “ahem… actually I don’t believe that.” And saying that I knew darn well I was not in the mainstream.) Also, trust me, I don’t in any way fault you for the original quote, it was totally understandable. I just thought it would be good to have a thread to force myself to think through some of these issues a bit more.

[quote=Rich Toscano]
– More directly you can see the impact on bond markets. So far this is the worst year EVER for bonds… I think that can be traced directly back to the Fed pivoting to a much more aggressive policy.

– And then there’s housing… you can bet that the housing market of this summer will look very, very different from that of last summer — due entirely to the change in the bond market, which is due in turn to the Fed-driven rise in rates.

– You might think – maybe rates are up because inflation is up, not because of the Fed. But if you look at rates and inflation, you will see that inflation was running quite high while rates stayed low for a while… the main inciting incident for higher rates was a pivot in Fed policy.

A lot left out here but in brief, that’s why it’s my view that “the Fed matters a lot”.
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At this point we probably end up diving off to arguments about what “a lot” means. Not sure this distinction means anything, but I would think of the fed mattering a lot if their policies directly affect the economy in a substantial way. What I see you describing is how market participants react to the fed who they perceive as being important. Maybe think of it this way. If market participants actually believed that if Punxsutawney Phil saw his shadow on Groundhogs day the market would tank, and sure enough that happened, would you say that Punxsutawney Phil mattered a lot? I wouldn’t but I can understand the view that others would argue that. So, I wonder if we have an ineffective fed but a market that believes the fed is very powerful, and sure enough any little policy change has repercussions that are larger than the policy and far reaching. I’m not sure I fully believe that myself, but I think it’s well worth pondering. (And I think Bernanke used to remark about how managing investor expectations was more important than actual policy, but maybe I’m misremembering Bernanke’s quotes.)