10-Year-Note ~ Monthly
This week's Fed meeting is getting a lot of attention; the market is pricing in roughly an 88% chance of a rate hike. Once again, the market is trying to tell the Fed what to do. But this Fed is different. They haven’t offered any guidance and say they don't want to let the market dictate policy. I am not smart enough to be the Fed chair nor a voting member, but to me the best course of action would be to buck market expectations by holding rates steady while announcing a concrete plan to reduce the Fed’s balance sheet, which would pull excess liquidity from the economy. In my view, this offers a bigger bang for the buck in controlling inflation without pinching consumers with higher rates. Instead, asset holders would be left holding the bag. I know this isn’t a popular take, but we have a K-shaped economy because asset holders have thrived while most people have struggled. Lastly, this method tightens the economy without letting the market dictate policy. In my opinion, and Fed Chair Warsh seems to agree, we can thwart a lot of this chaos by simply reducing liquidity in the system. There is too much of it. The problem is, doing the right thing by shrinking the Fed Balance sheet and overall money supply is like jumping off a merry-go-round that has been increasingly picking up speed. Eventually, we will fly off the ride anyway, but it might be less painful to exit voluntarily.