The consensus view is that this is the result of QE. The Fed has "pumped trillions of dollars into the economy." And that explains the blistering inflation print today.
But consider:
1. gold, the traditional inflation hedge, is at the same price it was in 2011 (~$1,800) after having gone nowhere in the last year
2. the 30-year treasury is yielding 1.85%, a real yield of -4.95%
3. the Eurodollar futures curve recently inverted [1]
4. The dollar is up noticeably against other currencies [4]
The "pumping money" idea makes no sense based on what QE actually does. Here's how QE works. The Fed buys a Treasury from a bank. In exchange, the Fed credits the bank with a reserve asset. That reserve asset is held in an account at the Fed and can not leave the Federal Reserve system. Nor can it be used to buy stocks, bonds, or CEO yachts. This is not "money" in the sense that most people think of the word. It's more like a kind of utility token. QE is a way to turn treasuries into reserve assets. In other words, it's a swap with no net money creation.
Regarding (1), some say derivatives are to blame for gold's abysmal performance. Well, similar derivatives markets exists for stocks, and those have been ripping higher thank you very much.
Well, the consensus view says, (2) is explained by the fact that the Fed controls the Treasury market. But does it really?
Consider the observable effects of QE by taking a look at a chart of 30-year treasury yields since the early 1980s and you'll see a straight channel running down and to the right. QE had zero effect on this long term trend line.[2] If the Fed actually "controlled" the treasury market during QE, wouldn't the trend line be broken in some way?
The most esoteric of these factors is (3). Still, the Fed's balance sheet has no eurodollar futures. So why is that this market is signaling lower yields and slower economic growth ahead?
Bottom line: the Fed is being blamed for skyrocketing inflation. However, there's a case to be made that the Fed's actions have little to do with what's going on because QE's effects on the economy actually make little difference. See, for example, the Bank of Japan, which tried QE long before the US and concluded that its effects were mixed at best.[3]
All of this leads to the conclusion that this kind of inflation print is a blip, and the Fed had nothing to do with it. In other words, inflation really is transitory. Gold, treasuries, and the eurodollar market are all signaling slower growth and lower inflation ahead. Possibly much lower.
QE is largely a confidence trick. It's time to have a closer look at the man behind the curtain.
If the Fed is behind the inflation, there is something we are missing. For example, I have personally struggled to find what bank reserves are useful for.
I surely doubt they're totally useless. I can only assume that they are a more preferential asset with relation to the Basel requirements on further loan creation. But since banks are not constrained by these requirements right now (as far as I understand), it's unlikely to have a meaningful effect.
Another way to look at it is that this is putting a floor on Treasury asset prices, which could in theory somewhat translate to asset price inflation as more market participants are able to liquidate their treasuries at a higher price, whose dollars would then go into other assets.
An alternate take is Jeff Sneider's - where he says that QE (and central bank actions, in general) are more of a tool for instilling confidence in the market rather than anything else.
But consider:
1. gold, the traditional inflation hedge, is at the same price it was in 2011 (~$1,800) after having gone nowhere in the last year
2. the 30-year treasury is yielding 1.85%, a real yield of -4.95%
3. the Eurodollar futures curve recently inverted [1]
4. The dollar is up noticeably against other currencies [4]
The "pumping money" idea makes no sense based on what QE actually does. Here's how QE works. The Fed buys a Treasury from a bank. In exchange, the Fed credits the bank with a reserve asset. That reserve asset is held in an account at the Fed and can not leave the Federal Reserve system. Nor can it be used to buy stocks, bonds, or CEO yachts. This is not "money" in the sense that most people think of the word. It's more like a kind of utility token. QE is a way to turn treasuries into reserve assets. In other words, it's a swap with no net money creation.
Regarding (1), some say derivatives are to blame for gold's abysmal performance. Well, similar derivatives markets exists for stocks, and those have been ripping higher thank you very much.
Well, the consensus view says, (2) is explained by the fact that the Fed controls the Treasury market. But does it really?
Consider the observable effects of QE by taking a look at a chart of 30-year treasury yields since the early 1980s and you'll see a straight channel running down and to the right. QE had zero effect on this long term trend line.[2] If the Fed actually "controlled" the treasury market during QE, wouldn't the trend line be broken in some way?
The most esoteric of these factors is (3). Still, the Fed's balance sheet has no eurodollar futures. So why is that this market is signaling lower yields and slower economic growth ahead?
Bottom line: the Fed is being blamed for skyrocketing inflation. However, there's a case to be made that the Fed's actions have little to do with what's going on because QE's effects on the economy actually make little difference. See, for example, the Bank of Japan, which tried QE long before the US and concluded that its effects were mixed at best.[3]
All of this leads to the conclusion that this kind of inflation print is a blip, and the Fed had nothing to do with it. In other words, inflation really is transitory. Gold, treasuries, and the eurodollar market are all signaling slower growth and lower inflation ahead. Possibly much lower.
QE is largely a confidence trick. It's time to have a closer look at the man behind the curtain.
[1] https://www.bloomberg.com/news/articles/2021-12-03/bets-that...
[2] https://fred.stlouisfed.org/series/DGS30
[3] https://www.frbsf.org/economic-research/publications/economi...
[4] https://www.tradingview.com/chart/?symbol=dxy