Quantitative Tightening

| May 06, 2022

Federal Reserve (Fed) Chairman Jerome Powell did his best on Wednesday. He tried to calm the markets by being highly transparent and told us to expect 0.50% rate hikes. He also downplayed the possibility 0.75% rate increases, which resulted in a relief rally. Additionally, he detailed the Fed’s plans for reducing the size of its balance sheet. Unfortunately, Chairman Powell has developed a credibility problem and markets sold off once again.

For now, the job markets and the economy remain strong. Some of the people who dropped out of the labor force are beginning to return, although the labor force participation rate remains dismal by historical standards. In March of 2000 the participation rate reached 67.3%. April closed out at a meager 62.2%. A portion of the decline is due to people retiring, since the rate for those 25-54 years old remains a relatively robust 82.4%.

The high cost of living and declines in the investment markets are forcing some of those who retired back into the labor market with reduced skills. The result is reduced productivity, which is the opposite of what the economy needs during our current period of high inflation. This only makes the likelihood of continued rate hikes greater, at least until we see more technological investments in productivity. We also need supply chains to improve. Bashing business will not help us achieve either of these goals.

The Fed and Congress inflated the economy and now the Fed intends to deflate the economy. Quantitative easing, the process of the Fed buying investments to herd investors into risk assets, is in reverse. We are entering a period of quantitative tightening. In the May newsletter I attempt to explain this in greater detail.

* FRED Graph Observations: Federal Reserve Economic Data. Link: https://fred.stlouisfed.org. Economic Research Division.

  • Labor Force Participation Rate - 25-54 Yrs., Percent, Monthly, Seasonally Adj. Observation date: 01.04.2022.
  • Labor Force Participation Rate, Percent, Monthly, Seasonally Adj., Observation date: 01.03.2000 / 01.04.2022