Could it Be the Fed’s Mega-QE Created so Much Liquidity that Tightening Doesn’t Work until this Excess Gets Burned Up?
Post by Wolf Richter
Excerpt:
Could it be... that so much central bank liquidity was created during and before the pandemic that financial conditions cannot meaningfully tighten, despite the Fed’s tightening, until this liquidity gets burned up?
The Fed alone, not counting other central banks, created $4.8 trillion within two years of giga-money-printing, as Musk would say; it has now removed $1.1 trillion of it via QT.
Could it be, with so much liquidity still out there, that it might take a lot more and a lot longer to tighten financial conditions enough to where they have even a chance of removing the fuel from inflation?
And that’s kind of funny because if financial conditions don’t tighten enough to slow the economy and remove inflationary fuel, and if it then turns out that this dip in year-over-year inflation rates was just a “head fake,” to then resurge again, as Powell said he suspects it might, the Fed will go at it with more rate hikes. Powell made that clear. With credit markets still blowing off the Fed, are they trying to make sure that “higher for longer” gets entrenched? That would be funny.
Credit demand is controlled by lenders who have no desire to get screwed by Fed policy that favors debtors. ZIRP was a royal screw-up and the Fed became the lender of last resort that pays itself back with cheaper dollars. We all pay the difference.