The Fed Hasn’t Had Control of Inflation Since the 2008 Financial Crisis – That Isn’t Going to Change Now

Theoretically, the Federal Reserve can control inflation.  To do so, it simply decreases the money supply by selling its enormous stockpile of bonds rather than buying them. That’s not just theory, that’s how it actually works.

However, decreasing the money supply – which also raises interest rates – will also destroy the stock, bond and real estate markets. 

The Fed, for obvious reasons, has no interest in destroying any of those markets. 

So, it’s not about to sell off much of its enormous stockpile of bonds .  Not because it wouldn’t want to, but because it can’t without crushing the stock bond and real estate markets.  Sounds a little repetitive I know, but it’s an important truth few Wall Street experts want to face.

In fact, the Fed has increased its bond holdings from $1 trillion 2008 to almost $9 trillion today.

The Fed can’t sell off even a small part of its stockpile of bonds.  It just keeps buying more.  Again, that’s not because it wants to, but because it has to.

Why?  You should know the refrain by now – because it will collapse the stock, bond ….

So, given the Fed’s clear record of NOT selling off any of its enormous bond portfolio for the last 15+ years, why would it suddenly be able to do it now?  If anything, it’s even harder for the Fed to sell its bonds now that the stock, bond and real estate markets are so highly valued.  That only makes it much tougher to raise rates today than it was 5, 10 or 15 years ago. 

Not going to happen.

The Fed won’t be able to control inflation by selling bonds.  Therefore, it won’t be able to control inflation.  Not now.  Not ever. 

Short term, investors can believe all sorts of fantasies, such as:  all we need to control inflation is a 1/2% increase in interest rates.  Of course, real math doesn’t support that in any way, but fantasy math… well, maybe if we all close our eyes and wish really, really hard, we can make a half percent increase in interest rates fend off 7+% inflation.  Or maybe the next new technology will solve all our problems.

Such fantasies could potentially work for years to come.   It’s hard to say.

But they won’t work forever. 

Until then, as always, party on!

PS  If the Fed can’t control inflation, what are we going to do?  Read our next update for the answer.