January 24, 2021

Economists like to keep tabs on the monetary aggregates. They also need a framework to process and interpret the monetary data. to make inferences and forecasts about the outlook of interest rates, inflation, and nominal GDP. Yet it is unusual for the analysts to explicitly describe their framework, which is critical of their forecasting process. The wrong modelling assumption could lead them to misinterpret the data and as a result make inaccurate forecasts. Nevertheless, based on their data interpretation, statements, and conclusions, one can infer or reverse engineer their framework. Judging by the new administration and Jay Powell pronouncements, we do not foresee the Fed attempting to reduce its balance sheet anytime soon. President Biden called for a large stimulus package and a whole host of additional government spending. If the tax revenues do not rise enough to cover the increased spending , the federal deficit will increase and so will the supply of government securities. This combined with Jerome Powell pledge to keep interest rate low as far the eye can see , suggest that the Fed is not contemplating a balance sheet reduction anytime soon. If anything, it is contemplating a balance sheet expansion. All of this leads us to expect the Powell fed to continue the current policy. As a result, we look for the fed s balance sheet to expand, the financial repression to increase, and the Fed to continue overestimating the inflationary impact of its policies and the inflation rate to continue below the 2% target .

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