I respect Chris's view and when I talk to friends who work at desks (buy and sell side), there does tend to be a lot of this thinking: The Fed is what matters and the Fed has decided it will manage markets ever higher. Where they are wrong is: 1) The Fed is not causing rates to be low. Rates are low (look at the developed world-- Eurozone and Japan in particular) because demand is weak. Demand is weak because of a variety of factors such as wealth inequality (reducing the role of the wealth effect, which means subsequent demand is not improved by rising asset prices) and austerity policies (Germany is obsessed with having an export surplus). This is a government policy issue, primarily in taxation and investment. Taxes need to rise, and that money needs to be invested. 2) The Fed is worried less about the stock market, and is worried more about the bond markets. As long as buyers and sellers can be matched, and there isn't a collapse in liquidity, I don't think the Fed would care if the markets moved lower. In today's market, the Fed is making a bet that the economic drivers that have been pushing the developed world towards lower rates will persist. In retrospect, I'm sure the Fed considers the latest tightening cycle to have been premature. Now, the question is whether they have the will to follow through. Inflation will continue to move higher, but unless demand has been changed sufficiently, this time is not different.
Exactly, a very important point ! Yes, inflation is due to supply constraints, not because of healthy consistent rise in demand. Sure, in short term, the latter can get speculatively elevated but speculation pyramid will always find its way back to the beginning. What's more, imo, in the future the "problems" are gonna lie in oversupply, not in overdemand. In the wake of amazon and the likes, at some point everyone will be a supplier. There isn't anything you desire that can't be supplied to you (unless we have supply constraints). Margins will continue to drop and tech will continue to allow price deflation. There is much less that the FED can and should do, while there is so much that the Government can and should do. Sooner or later, the wealth tax issue needs to be addressed. Not just raising taxes but actually GETTING those taxes.