How financial markets and the economy performed last time the Federal Reserve took away the punch bowl by raising its policy rate and pursuing quantitative tightening. Things worked out fine that time. Will it be different this time?
Topics covered include:
- Where did the phrase take away the punch bowl come from
- How central bank actions can slow the economy and lower inflation.
- The difference between having cash and having wealth
- How quantitative easing and quantitative tightening work
- What happened last time the Federal Reserve pursued quantitative tightening
Show Notes
M2—Federal Reserve Economic Data
Assets: Total Assets: Total Assets: Wednesday Level—Federal Reserve Economic Data
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Transcript
Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today’s episode—388. It’s titled “Will Quantitative Tightening Lead To Even Greater Losses For Financial Assets?”
Taking Away the Punch Bowl
In 1955, William McChesney Martin Jr, the Federal Reserve Chair, the longest-serving chair, who served from 1951 to 1970, he gave his speech before the New York group of the Investment Banking Association of America.
In this speech, he said, “In the field of monetary and credit policy, precautionary action to prevent inflationary excesses is bound to have some onerous effect. If it did not, it would be ineffective and futile. Those who have the task of making such policy don’t expect you to applaud. The Federal Reserve, as one writer put it, is in the position of the chaperone who has ordered the punch bowl removed, just when the party was really warming up.”
Ever since then, the phrase “take away the punch bowl” has been associated with central bank actions to slow economies in which inflation is too high, or at risk of getting too high.
Central bank actions to take away the punch bowl include raising short-term interest rates and quantitative tightening.
In this episode, we’ll explore what those actions mean, and what happened the last time the Federal Reserve initiated quantitative tightening.
The Temptation to Panic
This is important because financial markets are absolutely freaking out. Stock markets are down sharply this year. Bond prices have fallen. Cryptocurrency is cratering.
Pundits are predicting a recession, stagflation, or other calamities. Investors and fund managers are incredibly pessimistic, the most bearish they’ve been since March 2020, at the start of the COVID-induced economic shutdown.
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