Darius joined our friend Maria Bartiromo on Fox Business last week to discuss the Fed’s policy on inflation and what it means for asset markets.
If you missed the interview, here is the most important takeaway from the conversation that has significant implications for your portfolio:
The Fed Is Kowtowing To Fiscal Dominance, And We Believe It Will Accept Higher Than 2% Inflation Over The Long Term
- The FOMC has stated that it would need greater confidence that inflation is moving sustainably towards 2% before easing policy. However, recent data hasn’t provided that needed confidence; instead, it suggests a prolonged timeline for achieving 2% inflation. If higher inflation persists, the Fed has stated they will maintain the current level of interest rates for as long as needed, rather than tightening further.
- When we refer to the monetary authority “kowtowing” to fiscal dominance, we are describing a situation where the Federal Reserve is being influenced by the government and fiscal policymakers. In 2023, the Federal Budget Deficit grew by $364 billion. The Fed is accepting the increased government spending will continue and inflation will remain elevated.
- Our analysis of prior economic cycles found that periods when the monetary authority kowtows to fiscal dominance are structurally bullish for risk assets like stocks and crypto and structurally bearish for assets like the bond market.
That’s a wrap!
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