The Fed’s Jelly Donut Policy: 10 Years Later
June 9th, 2022
In May 2012 David Einhorn of Greenlight Capital penned an article titled The Fed’s Jelly Donut Policy in the Huffington Post, discussing the current economic environment through the eyes of The Simpsons.
Einhorn’s view was that easy money policies needed to stop, since the economy had since recovered after the Global Financial Crisis in 2008.
Now over 10 years later the Fed is finally ending those easy money policies–namely keeping interest rates artificially low.
Why are we so concerned with interest rates? Jim Grant said it best:, “The most important price in the world is the price of money: namely, interest rates.”
The Fed kept the rate at zero between 2008 and 2015, but the recession ended in June 2009. In 2013 the Fed announced they’d be “tapering” bond purchases, only to be met with hostility from markets, resulting in the now famous taper tantrum.
Small rate hikes started in 2015 and 2016, only to reverse when many argued we had a recession in 2016 that wasn’t measured as one. In 2018, the Fed tried to hike more and again it was met with a market meltdown when the US 10-year Treasury yield rose above 3%.
Then COVID happened and we had a mix of both monetary and fiscal policy working together.
Now, the Fed is embarking on a hiking cycle with a real threat of sustained inflation, something we haven’t had to deal with for over 30 years.
Before the Global Financial Crisis, the Fed’s balance sheet was under $800 Billion. Just recently, it was over $9 Trillion.
Currently, the two big questions are: when will the Fed stop hiking and how much of the balance sheet can they roll off before they start buying again?
Over the past decade the most important topic in global markets has been the role of central banks. When The Jelly Donut Podcast launched in 2019, the goal was to explore exactly that.
Now over a decade later, we begin to see the second chapter in this story unfold–and it will certainly be interesting to see how it all plays out.
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