This afternoon, the Fed will announce its latest policy decisions. It seems everyone agrees that there is little the Fed can do to bring desperately needed workers back into the workforce to solve the supply shortage causing much of the steadily rising inflation. Printing less money by no longer buying treasuries and mortgages, raising interest rates, and reducing the money supply by not reinvesting money as bond holdings mature are all eagerly being forecasted for the Fed. In fact, it feels like economists are trying to one-up each other by revising their estimates for a faster and faster shift tightening of Fed policy. Estimates for 2 rate increases went to 3, and now the consensus is for 4 rate increases of 25 basis points each this year. The cessation of bond purchases moved up from June a few months ago to the Fed stating they will be done by March. Economists instantly began to forecast how quickly the Fed would reduce its nearly $9 trillion worth of bonds.

Surprisingly, investors are excited about it! It’s fascinating to see Fed tightening that is normally feared by investors being so intensely desired. I know I can’t wait for the Fed to stop printing money and reverse course. Heck, I find myself really looking forward to rates no longer being stuck at zero even though I fully understand the potential pain for our bond clients caused by rising rates. It is clear that higher yields make life harder on consumers and businesses and reducing the money supply will erode support for both the stock and bond markets. This enthusiasm for today’s Fed announcement is especially noteworthy given the backdrop that we all know none of the tools the Fed has can solve worker shortage-induced inflation.

So why all the excitement? I’m not really sure, but I think it has something to do with the growing unease we have, knowing in our gut that a $5 trillion federal deficit last year combined with the Fed increasing the money supply by amassing nearly $9 trillion in bonds is just bad and wrong somehow.  Policies that are clearly unsustainable and the longer they persist, the worse it is. Knowing it’s a bad policy, there is a strong feeling of needing to fix it. And fix it now. As a check to see if I’m nuts in this assessment of market sentiment, I considered if I and others might feel better or worse if short term rates were at 2% instead of zero, the Fed balance sheet was “only” $7 trillion instead of $9 trillion, and the fiscal deficit was “only” $2 trillion instead of $5 trillion. I believe the majority of investors and certainly economists would feel better even knowing the risks.

Otherwise, I am at a loss to explain why the market seems so eager to trade in the Fed’s punch bowl for a root canal.

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Author Portrait
Bryce Doty is a Senior Vice President with Sit Fixed Income and Senior Portfolio Manager of the taxable bond portfolios for the firm’s custom separately-managed accounts, private investment funds, and mutual funds. Bryce oversees the firm’s team of taxable bond managers, analysts, and traders.