November 26, 2022

By combining QT with the management of the interest rate spread, the Fed may be able to accomplish its goal of reducing the balance sheet and returning the inflation rate to the 2% range with a minimal adverse effect on the economy. Powell is now tasked with cleaning the mess that he and his two predecessors created. Our analysis suggests that the Bernanke Fed only did half of the job - it averted the crisis but left the unwinding of the balance sheet to its successors. If we are correct, then he only deserves half of the Nobel Prize and whoever completes the unwinding of the balance sheet deserves the other half if they do it smoothly. We believe that with QT and the management of the commercial paper-fed funds rate spread Jay Powell has the tools necessary to engineer a soft landing. All that is left is for the Powell Fed to execute.

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