Quarterly Economic & Market Observations

In this quarterly instalment of Economic and Market Observations, we go back to the classics to explain that the loss of price stability is a tragedy of central banking. We will cover the unfolding leading up to our current predicament: • We believe well-intentioned Federal Reserve (Fed) officials had the tragic flaw of believing good economic performance for the first two decades of this century owed uniquely to their skill and not partly to good luck. • A reversal of fortune followed as the pandemic disrupted longstanding sectoral trends and set fiscal authorities into more energetic motion than ever before, which central bankers were slow to recognize. • The result was catastrophe; inflation returned to levels last witnessed forty years ago and only sluggishly reversing. • Not recognizing that the problem was partly of their doing has made it difficult for the Fed to convince the public of the remedy—a sustained, restrictive policy rate that makes economic recession probable. • As a result, important asset markets are mispriced, financial strains loom large, and attendant risks to corporate balance sheets are sizable. Tragedies, by definition, do not end well and have serious, long-lasting consequences. The hope is that it leads to understanding, or catharsis. The fear is that it yields to retribution, or nemesis, in the form of the loss of central bank independence and permanent slippage of the anchor of price stability. Please view the transcript under the attachments tab for important disclosures.