The Fed Overstepped…

And lost its credibility. A few factors stand out.

• In a sense this was bound to happen after the 12 years of artificial markets, starting with Bernanke’s QE2 in 2011. Neither the markets nor the Fed knew what was really happening. Supply and demand fell by the wayside. The only thing the Fed found out was that the lower bound on interest rates was “0”. And QE seemed to have no limit.
• Then in 2021 inflation came back, with supply chain and Ukraine issues prominent.
• Then the Fed found itself not knowing how to bring back a real market based economy. How much would they need to raise rates with inflation over 6 %. They could have looked at 200 years of history and found that 3.5 percent is a good number. But instead, they seemed to believe that they would need to go all the way up to the inflation level, so we heard a lot about 5 and 6 percent Fed Funds rates.
• A little common sense would say that raising rates by any amount after having been at zero for so long, would have a large effect, and maybe going halfway up to the inflation rate would get the job done.
• In summary, where average market rates are tonight 3.646 % is probably in the ballpark.