Taps Coogan – February 18th, 2021
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Julian Brigden, Co-Founder and President of Macro Intelligence 2 Partners, recently spoke with Macro Voice’s Erik Townsend about why he believes that the late 1960s are the best analogue for the current market environment.
In a somewhat technical discussion, Mr. Brigden describes why the current levels of deficit spending, which he describes as so big that ‘a Banana-Republic wouldn’t be allowed to do it,’ are going to kick off inflation faster than people realize and force the Fed to either focus on fighting inflation or protecting the financial markets.
He expects that after enduring some pain in the markets, the Fed will throw in the towel on the idea of Fed independence and keep monetary policy accommodative in the face of rapidly rising inflation to avoid social unrest.
Enjoy the full discussion:
From where we stand today, it’s natural to see ever more accommodation as the path of least resistance for the Fed. Indeed, we’ve argued for that scenario repeatedly here at The Sounding Line.
However, the scale of additional QE that is likely going to be needed to keep benchmark rates like the 10-Year treasury from rising in the face of rising inflation and huge federal deficits is easy to breeze over. Our back-of-the-envelope math says the Fed may need to double, or maybe even triple, its current pace of QE to halt a rise in long term treasury rates.
It’s also easy to overlook just how reckless of a policy that would be, as Mr. Brigden drives home in the interview above. The Fed would be accelerating QE because inflation expectations were pulling borrowing costs higher. Remember, accelerating QE also happens to be their policy tool for increasing inflation.
Maybe the Fed will drag its feet ever so lightly? Markets better hope not.
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