Federal Monetary Policy Blunders Causing Collateral Damage: An Examination of Questionable Practices

The S&P 500 has plunged back into bear market territory, marking a 4.6 percent decline for the week. This downturn is the fifth worst performance of a trading year after 182 trading days in the past 90 years, raising concerns about the health of the US economy.

The Federal Reserve (Fed) is taking a particularly aggressive stance in its interest rate tightening cycle, according to economist Jeremy Siegel, who views this as the greatest mistake in the Fed's 110-year history. The Fed's hawkish approach is driven by its commitment to combat inflation, which is currently the main driver of the bond market.

Inflation itself and the base effect are considered the biggest enemies of inflation, and the Fed has communicated its unwavering determination to tackle it "whatever it takes." The Fed's long-term interest rate expectations, as indicated by the dot plots, are likely to be wishful thinking, with interest rates above 4.5 percent expected to persist for almost one and a half years. This could increase "pain" for the US export industry.

The steady increase in US housing prices over the past decade has been fueled by ultra-low interest rates. However, the rise in interest rates has made mortgages more burdensome, with many Americans grappling with rates of about 20 percent. As a result, over 500 million "credit cards" in the US are now burdened with such high-interest rates, a trend that is strongly increasing.

The decline in the S&P 500 and the rising interest rates have also taken a toll on the housing market. Sales of existing homes have been falling for seven months, leading some analysts to draw comparisons to the last housing bubble. The high-interest rates have made mortgages increasingly unbearable, contributing to the decline in sales.

The next Consumer Price Index (CPI) release is scheduled for October 13, which will provide further insights into the inflation situation. Jerome Powell, Federal Reserve Chair, supports his hawkish stance on the strength of the US economy, particularly the very strong labor market.

The AAII survey showed a bearish sentiment of 60.9 percent among individual investors, compared to a historical average of 32 percent. This indicates a pessimistic outlook among investors, which could further impact the market.

Despite the economic turmoil, the market is still expecting rising earnings for 2022 and 2023. However, declining corporate earnings have not yet been reflected in the big index.

Jerome Powell's term as Fed chairman runs until May 2026, and while there is speculation about his successor, including Kevin Warsh and James Bullard, no immediate replacement is expected unless Powell resigns. Political pressure exists, but the president cannot directly remove the Fed chair, making any change unlikely before the term ends.

One factor that has supported consumption in the US is the use of homes to borrow for consumption purposes. However, the decline in real incomes for 17 consecutive months has put a strain on this strategy. Almost all of the 23 industrial countries in the MSCI World have already raised interest rates multiple times, with the exception of Japan and China.

The Fed is willing to accept a recession to restore its credibility in the markets. However, the impact of such a recession on the US economy and its citizens remains to be seen.