Joseph Lavorgna

Old Habits Are Hard to Break

F inancial markets continue to ponder the timing of a slowdown in asset purchases. The Fed has been purchasing $80 billion of treasuries and $40 billion of MBS per month since the onset of the pandemic. Strong growth and elevated inflation render these purchases less necessary. Some policymakers want to taper the buying program soon and complete the process by the middle of next year. While these may be laudable goals, remember that monetary policy works primarily through the wealth channel. Household equity holdings , as a share of disposable personal incom e , are at an all-time high. And consumption has been the primary driver of the economic rebound. The growth in the Fed’s balance sheet has correlated almost perfectly with the increase in stoc ks . Thus , a significant tightening of financial conditions is possible whenever the Fed announces a dialing back of QE .

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Joseph Lavorgna

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