Fed Walking A Very Tightrope

One year ago, post-pandemic, the central bank essentially urged investors to take on risk and get on the risk curve, and the latter obliged. Now, anytime the Fed tries to walk back, the latter throws tantrums and the former hands out goodies. This has driven one after another metric into uncharted territory.

Chart 5 looks at the prevailing parabolic growth in household wealth versus disposable personal income. In 4Q20, net worth comprised 754 percent of disposable personal income – a record. The two are so out of sync, with the red line going vertical in the second half. The question is not about its sustainability – it is not – rather about how the Fed goes about restoring sanity back without any disruption. The longer it waits, the harder it gets.

For now, Mr. Powell later today will try to convince the bond market why an Operation Twist, in which the Fed sells short-term notes and buys long-term notes and bonds, is not the need of the hour. Fingers crossed!

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