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Fed is simply becoming a little less loose. They are still expanding the balance sheet.

 Real interest rates are still negative, and will remain so unless the Fed hikes far more than anyone expects, or inflation drops faster than anyone expects.

First, we must realize quantitative easing was intentionally designed to push up stock prices. It was not a surprise to policymakers. 

From my friend Peter Boockvar: Fed Chair Ben Bernanke said in a November 4th, 2010 editorial he wrote in The Washington Post....

Free liquidity (or better than free, in real terms) is Wall Street’s fentanyl. The US Treasury is similarly addicted. 

The skeptical among us might note that the Fed’s track record for engineering soft landings is essentially 0 

What happens when they try to end QE and the stock market drops 20 or 30%? I’m not forecasting that but it’s a real possibility. Valuations are stretched. Remember the taper tantrum? 

 I have no idea. Further, I don’t think he does either. At most Powell will say that his choice will depend on the data at that time. He will have a very dovish and politicized board pushing him, not wanting a weak stock market in an election year.

John Mauldin 7 January 2022


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