The Fed is running a virtual repeat of 1937.
The common narrative is that the Fed “didn’t do enough” during the Great Depression. This is used to justify the Fed’s use of non-stop extraordinary monetary policy post-2008.
But it’s a total lie.
The Fed went bananas in the aftermath of 1929, expanding its balance sheet by 300%. On a relative basis, the Fed’s balance sheet grew from 5% of US GDP to 23% of GDP.
This is an expansion relative to GDP is IDENTICAL to that which the Fed has accomplished since 2008. And the outcome is looking to be the same.
In 1933, CPI began erupting higher. By 1937, CPI was 3.6%. The Fed was forced to hike rates to halt inflation, kicking the weak US economy in the teeth and triggering a particularly nasty recession.
Today, the same issue is occurring. Core CPI hit the Fed’s alleged target of 2% in November 2015 and has remained above it ever since. Inflation is rising.
The Fed might be able to put off hiking rates for a time, but eventually this will become a REAL issue. Particularly since CPI cleared 2% when Oil and most commodities were 40% off their highs.
Eventually the Fed will be forced to hike. And when it does, it will kick an already recessionary US economy into a severe contraction. Remember in 1937, the stock market HALVED after the Fed was forced to hike rates.
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Chief Market Strategist
Phoenix Capital Research