Hail Zorp! The Fed Waited Too Long (Again) To Fight Inflation, Now Banks and Consumers Are Getting Hammered (Mortgage-backed Securities Got Clobbered Once Fed Started Raising Rates)

Former Fed Chair (and current Treasury Secretary) Janet Yellen protected President Obama by raising The Fed’s target rate only once while Obama was in office. Then raised rates 8 times after Donald Trump was elected in November 2016. Well, Fed Chair Jerome Powell was following Yellen’s TLFTL (Too Low For Too Long) playbook by delaying raising rates once inflation hit 2% in March 2021. Unlike Yellen and he zero interest rate policies (ZIRP or ZORP for zero OUTRAGEOUS rate policy).

One of the safe assets that Federal regulators encouraged banks to hold was agency mortgage-backed securities. The orange circle denotes when headline inflation YoY hit 2% (March 2021). Powell and the gang waited over a year (remember, they said inflation was “transitory”). But another Democrat, Biden, was now President and Powell (like Yellen) didn’t want to rock the boat. So, Powell and the gang waited until headline inflation hit 7% before they took action. Like Yellen, Powell waited too long .

The result? Agency mortgage-backed securities (MBS) got clobbered (white line) as MBS duration (purple line) rose dramatically. Duration is the weighted-average life of MBS and is a measure of risk.

Any surprise that unrealized losses have been piling up at US banks? Not really, only some regional banks weren’t paying attention and got crushed.

The fed has only one tool they use for inflation fighting, raising the interest rate. This stops people from spending borrowed money and that supposedly slows down the economy and that slows down inflation. But the inflation isn’t caused by people borrowing money. Suppose you have a small town with ten people and one baker. Each person has one dollar to spend on bread and each loaf costs one dollar. Nobody can buy all the bread because each person has only one dollar. Now, the government comes in an drop’s money from a helicopter and everyone has five dollars to spend. The first person to arrive at the bakery buys all the bread. The baker discovers his costs have gone up, so he has to raise his prices. The next day the price is five dollars per loaf, and everyone decries the inflation. In reality, nothing has changed except the amount of money in the economy. During Covid the US government printed more quantitative easing money than the entire rest of the world combined. Now, we’re shocked, shocked I tell you, that there’s inflation and it can’t be controlled by raising interest rates. That’s because the horse left the interest rate barn two years ago and has been getting farther away every minute.

Congress went on a spending spree of $6.3 trillion in less then 2 years and then to pay for it they had interest rates jacked up which caused prices for everything to skyrocket figuring the inflation they caused will do down by the next election cycle and hoping people forget and the democrats can say they saved the economy.

Jan 2021 Biden intentionally raised the price of fossil fuels.
Mar 2021 The ARA passed to spend trillions we don’t have and use inflation as a way to pay for it.
Aug 2021 the IRA does the same thing.
Aug 2021 Biden demonstrates in Afghanistan that his office is incompetent troop movement.
Based on Jan 2021 Putin can pay for his war.
Based on Aug 2021 Putin has a green light to go with a war.
The war devastates the bread baskegt of the Eastern Hemisphere causing world food prices to rise.
Jan 2021 to present Biden increases the cost of doing buiness through excessive regulation.

Actions like this caused inflation.

The FED is not perfect. But Biden has made it near impossible for them to do their job.

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