In my last newsletter article, I explained what tapering means and how that would affect the market. At the end of the article, I opined that the Fed’s leisurely pace of turning off the money spigot may not be enough to turn the tide of inflation.

It now appears the Fed agrees with me. The latest announcement from the Fed has dropped the word “transitory”, signaling its recognition that inflation is here to stay. Not only that, but the Fed’s taper timetable has been expedited. The original plan was $15B less money “printed” every month, with July being the month that money printing will come to an end. The new timetable is to end money printing by March. After that, the Fed plans to raise interest rates three times.

The Fed is the banker for banks. When the Fed raises interest rates, banks have less incentive to lend out money since they could easily make a profit by just parking their money with the Fed. This is the traditional way of reducing the amount of money in circulation. 

Will this be enough to tame inflation? I doubt it, since inflation is not a purely economic phenomenon, but also a social and psychological one. Once people start to expect inflation, it can become a self-fulfilling prophecy despite a reduction of the money supply. In 1978, the last time the US had a serious inflation problem, Paul Volker, the then Fed chair, had to institute a 15% interest rate to tame it. I hope we don’t get to that point. 

The current Fed may have to tighten further and further. I expect the effects will be:

• Fringe markets like cryptos and NFTs will suffer first. In fact, we are already seeing that.
• The general markets may prefer stable assets that produce cash to more speculative ones. 
• We shall expect lower investment returns and higher volatility.

I plan to do a rebalance early next year for myself and my clients to reflect this outlook. The reason I will not be doing it before year-end is to avoid capital gain realization since our portfolios have gone up so much. 

Schedule a 2nd opinion financial review, buy my wealth mgmt books on Amazon.