The myth of hyperinflation series- #3. Fed's effectiveness

FRED:GFDEBTN   Federal Debt: Total Public Debt
How effective are Fed's monetary policies and tools?

Fed has three simple goals- Grow GDP, keep inflation rate steady and keep the unemployment rate low.

Some argue that Fed's perceived power over the market was exposed during several occasions-

#1. During the 2008 in the midst of sub-prime mortgage crisis, the market continued to plunge despite the Fed's efforts to bail out Fannie & Freddie and other financial institutions, implement the Troubled Asset Relief Program (TARP) and issue $800b stimulus package. The market finally stopped the bleeding in early March 2009.

#2. When Fed ended the QE3 in 2014 by announcing its attention to raise the interest rate and slash the Fed balance sheet , many people believed market would crash. Instead, market shot up to ATH in 2015.

#3. This year during the onset of the Covid-19 crisis, Fed started out by cutting the rate by half percentage to no avail. Afterwards, Fed intensified its intervention effort by reducing Fed fund rate to zero. Nonetheless, the market tanked another 15% before it hit the bottom.

One can point to the Fed-induced booming housing market in early 2000 as the major factor for the fast economic recovery after the bubble and uses it as the counter example.

Market is driven by crowd sentiment, but crowd sentiment, which in turns, is partially driven by Fed's decision. It is a chicken and egg conundrum. They both influence each other, but the degree to which each influences one another is impossible to discern.

The safe conclusion to draw is that it would be overly optimistic to rely on Fed to get us out of the next financial crisis unscathed as it will take more and more stimulus package to get the job done. The best it can do is to mitigate the severity of damage.

Next, let's examine some of the conditions and criteria that are related to inflation .