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Jan. 29, 2022, 9:09 a.m. EST

The party’s over: The Fed and Congress have pulled their support from workers and investors

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By Rex Nutting

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But a portion of our inflation problem is the classic imbalance of too much money chasing too few goods and services. The COVID recession was the first downturn in history that left most people richer than they had been before. Congress pumped trillions into household and business bank accounts. The Fed pumped trillions into reserve balances, and some of that sloshed into financial markets. And the world of crypto created trillions more out of thin air, the ultimate fiat currency.

Fiscal policy supported the incomes of the working class while the full faith and credit of the Federal Reserve stood behind the portfolios of the investing class. Everyone felt richer and they spent like it.

The “problem” of too much money is being solved, even before the first increase in interest rates.

Real incomes falling

Incomes are now dropping like a stone. Most of the support Congress provided last year and the year before has been withdrawn. Real disposable incomes (adjusted for purchasing power) fell at a 5.8% annual pace in the fourth quarter and are on target to fall further in the first quarter as the refundable child tax credit goes away and inflation eats up any wage gains workers manage to get.

Workers managed to save some of the windfall that Congress provided earlier, but they’ll soon run through that. Then hunger and the need to put a roof over their heads will bring millions back into the labor force, resigned to take any job, no matter how unsafe, inhumane or poorly paid. It will give new meaning to the phrase “The Great Resignation.”

And what of the wealth of the investing class? As of early January, it was up about 30% (or a cool $30 trillion) since the depths of the March 2020 selloff. The S&P 500 is down about 10% from its highs. Gradually, financial markets are repricing the value of the Fed put—the now-obsolete assumption that the central bank would keep filling up the punch bowl whenever it looked like the party might end.

If the Fed isn’t going to support asset prices any more, then most assets look a little (or a lot) overvalued. They’ll find a new equilibrium soon enough. But odds are that wealth of the investing class won’t go up another $30 trillion over the next two years.

Where does that leave the economy? Powell says that the economy is strong and that everyone can tolerate the Fed’s anti-inflation medicine. But I think that’s bluster. Underneath the surface, the foundation looks weak.  

The question for Powell is this: Who’ll crack first?

Join the debate

Nouriel Roubini: Inflation will hurt both stocks and bonds, so you need to rethink how you’ll hedge risks

Rex Nutting: Why interest rates aren’t really the right tool to control inflation

Stephen Roach: Thankfully, the Fed has decided to stop digging, but it has a lot of work to do before it gets us out of hole we’re in

Lance Roberts: Here are the many reasons why the Federal Reserve won’t raise interest rates as much as expected

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