Credit: Federal Reserve
We are at the peak inflation period looking like we are in for the slide back down towards normality. It looks likely we are a year or two away from getting back to normality.The bottom line is “money supply” and the creation of lots of money supply during Covid is being reversed to get inflation back towards 2%.
Money supply has to be adjusted against a background of fragility caused by draining money from the system because “the weak” members of the economy will go bust if the draining is too fast for them to adapt. We have seen this with U.S. banks and Credit Suisse, the fragility of a market with no recourse to additional funds will cause failures. So this will mean the process will not be linear and will be attempted to break as little as possible.
Federal Reserve Balance sheet up, markets up. Balance sheet down is what we see happening. As such the market is going to be gritty in the near term as the Fed is pulling in liquidity again. Bears will continue to predict Armageddon and if you look at the Fed’s balance sheet and imagine they will keep tightening until it is back to the good ole days then you could go along with the doomsters’ point of view. When the balance sheet reduction since 2022 was responsible for a huge stock market haircut, you can project what a reduction back to pre-2008 levels or even pre-Covid levels would do.