Fed’s Mester backs shrinking balance sheet ‘as fast as we can’ without pushing markets off track

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Do we not recall what happened last time the Fed tried to reduce their balance sheet? Janet Yellen announced the runoff in October 2017. December 3rd, 2018, the yield curve inverted. What followed was the most aggressive market correction that we’d seen to date, since the recovery from the financial crisis. Which yields were inverted? 2-5 year treasuries. What did the Fed buy a mountain of, then try to roll off their balance sheet? 2-5 year treasuries. The Fed has destroyed the market’s ability to price risk. The idiocy of QE cannot be undone without “pushing markets off track,” and much worse. There is no escape without great suffering, and the working class will suffer most.


The Fed made betting against the bond market a widow maker. They killed the bond vigilantes that gave policy makers a check on their excesses. Or so they thought. They just morphed into market vigilantes and took the other side of that bet. “Go ahead-Try to bring rates to 2.5% and run that balance sheet down appreciably. We’ll tank tech!”


I want to see a mathematical formula that links dB/dt, the rate of balance sheet reduction by the Fed, and dR/dt the rate of interest rate increase, to dI/dt the rate of change of the inflation rate and I(t) the inflation rate at any point in time. The Fed can supply this so that Congress can debate on how to bring down I(t) to <2% over time, t.