You know the old joke – “Predictions are hard… especially about the future.”
And it’s true, nobody has a crystal ball.
But it’s astonishing to see just how horribly wrong the people in charge can be in their predictions, especially about the very near future.
You probably remember Joe Biden famously insisted in the summer of 2021 that the Taliban was “highly unlikely” to take over Afghanistan.
Boy did he turn out to be wrong.
Only a few weeks later, the Taliban was in control of the entire country… and the world watched in utter astonishment as US military helicopters evacuated embassy personnel from Kabul in one of the most shameful episodes in modern American history.
Not to be outdone, it appears that the Federal Reserve has just had its own Afghanistan moment.
It was only Tuesday of last week that the Fed Chairman testified before a committee of concerned senators who thought the Fed may be tightening monetary policy (i.e. raising interest rates) too quickly.
This was a valid concern; rapid interest rate hikes DO create a LOT of risks. And one of those risks is that asset prices– especially bond prices– plummet in value.
This risk is particularly problematic for banks because they tend to invest their customer deposits in bonds.
In fact, now that the Fed has tightened its monetary policy so quickly, banks across the US have more than $600 billion in unrealized losses on their bond portfolios. This is a pretty major problem… because that $600 billion is ultimately YOUR money.
And it’s not like the Fed doesn’t have access to this information; after all, the Fed supervises nearly EVERY bank in the US financial system.
And yet last week the Fed Chairman completely rejected this risk, telling worried senators flat out that “nothing about the data suggests to me that we’ve tightened too much. . .”
In other words, he believed the Fed’s rapid interest rate hikes posed ZERO risk.