When the Fed expands its balance sheet it’s easing monetary policy, regardless of what it’s called. From Claudio Grasso at lewrockwell.com:
“The essence of the interventionist policy is to take from one group to give to another. It is confiscation and distribution. “ – Ludwig von Mises, Human Action
In less than a year, we have witnessed an unprecedented monetary policy rollercoaster by the Federal Reserve, which began with a momentous U-turn in the central bank’s guidance in January, and has continued to escalate ever since. It is easy to forget that less than a year ago, all official statements and market expectations were aligned with sustained tightening, while repeated rate cuts were considered highly improbable, to say the least. Equity investors were almost coming to terms with the idea of policy normalization and the Fed was seen by conservative market observers and economists as one of the very few at least somewhat responsible central banks, as it did make some progress in shrinking its balance sheet, as opposed to the ECB and the BoJ. However, this entire tightening experiment came to an abrupt and early end, when Fed chief Powell made it clear that he intended to follow in the footsteps of his peers and decisively return to the accommodative policies of the past.
Thus, the tightening phase was stopped and once again we saw interest rate cuts, as well as liquidity injections in the repo market. All the while, the market reaction was lukewarm at best, with volatility persisting at high levels and recent economic data still raising serious concerns over an upcoming recession. At the same time, the Fed went to great lengths to highlight that all recent easing measures were not the result of recession fears. For instance, Mr. Powell characterized the two interest rate reductions this year as a mere preemptive “insurance” move, to protect and sustain the economic expansion, which should not be construed as a warning sign of economic trouble ahead. To the contrary, he insisted that the US remains on a firm footing and there is nothing to worry about.
