My Comment: I think the Fed will abandon tapering once the stock market caves. The Fed will do everything possible to avoid a recession which means once we do have a recession it will be far more destructive.
Excerpts: The Fed, however, faces multiple challenges as it aims to engineer a soft landing for the U.S. economy in 2022. First, a sustained period of near-zero policy rates and the extraordinary amount of liquidity that the Fed has been pumping into the financial system since March 2020 have contributed to speculative fervor and a spike in asset prices.
A second challenge facing the Fed relates to its ability to attain the necessary terminal rate to restore price stability while still maintaining steady economic and financial conditions. Given the explosive growth in both U.S. public debt and non-financial corporate debt, the Fed may be facing a serious debt trap.
Economist Nouriel Roubini recently observed that "With such a massive build-up of private and public debt, markets may not be able to digest higher borrowing costs. If there is a tantrum, central banks would find themselves in a debt trap and probably would reverse course. That would make an upward shift in inflation expectations likely, with inflation becoming endemic."
However, even a modest spike in yields will imply a substantial increase in net interest payments for the federal government. Corporate debt has also exploded and threatens the Fed's ability to fight inflation by sharply raising interest rates.
Meanwhile, a variety of factors suggest that upward pressure on prices will persist and cause high inflation expectations to become embedded in the system. For instance, rising home prices and surging rents indicate that inflation may be stickier than the Fed had originally assumed. Structural developments and population shifts may be driving up home prices and creating sustained pressure on rents in a wide range of communities across the U.S.
Furthermore, U.S. shale oil producers have abandoned their "growth at any cost" model and, along with their Big Oil brethren, are exhibiting capital discipline to keep investors happy. Such behavior does, however, limit the potential for a near-term domestic oil and gas production surge that could ease supply concerns. Rising energy costs and unusual weather patterns are also contributing to sustained food inflation.
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