The Fed is headed into uncharted territory and it’s fraught with danger
The U.S. Federal Reserve has taken an almighty gamble by brushing aside deflationary warnings from the bond market and raising interest rates in a blizzard of weak data.
It has taken an even bigger gamble by choosing to reverse quantitative easing when there is no need to do so, and to proceed in the face of very influential counter-advice from top economists.
Under this double-barrelled tightening, the Fed will start selling its $4.4 trillion bond portfolio before interest rates have returned to anything like normal levels, and before it has built up a safety buffer against a fresh shock.
This is a huge mistake. They have no idea how to unwind it
This could prove one of the most fateful decisions of modern economic history. Whether or not the Fed has judged this correctly will shape the future of market capitalism, and with it the prospects for Western liberal democracy.