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Has monetary policy become impotent?

06.20.2019

Has monetary policy become impotent?

Since 2007, through the crisis and the eventual recovery, Federal Reserve monetary policy has arguably been one of, if not the largest, factor in the evolution of U.S. financial markets, perhaps most noticeably in equity and bond markets. The most recent demonstration was at year-end 2018 when U.S. equity markets were down nearly 20% from the peak on fears of a hawkish Fed; only to reverse, recouping those losses in Q1 of 2019, driven by relief that the Fed would at the very least be patient, if not accommodative.

Yet during this period of over ten years, with rates at or near zero for most of the time, inflation - as measured by Personal Consumption Expenditures (PCE) (the Fed’s metric of choice) - has spent most of that time lower than its stated 2% target. With inflation at roughly 1.5% today, the logical conclusion is that monetary policy (low rates and QE) alone cannot push inflation up to 2% in a sustainable way.

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