The New York Times called it “A Fascinating Page-Turner Made From an Unlikely Subject: Federal Reserve Policy” and it was exciting to read as inflation jumped so high that the Federal Reserve had to (1) bump up the interest rate a couple of days ago, (2) announce that there would be further interest rate increases, and (3) that the Fed would start off-loading about a trillion dollars a year from their “quantitative easing” reserves of NINE trillion dollars. If they continue at that rate, the treasury bills they hoovered-up would be cleared from their books by the end of this decade.

Now I know how to read an FOMC statement. Now I understand where the money came from that John Doerr was investing in environmentally-conscious startups. How interesting that his announcement of a One-Billion-Dollar-Plus donation to Stanford University practically coincided with the increase in the Federal Funds Target Rate. Now I understand that inflation is more than the price of bread, that there is also “asset inflation” like the price of houses and Picassos. “Quantitative Easing” pushed so much money into the hands of Venture Capitalists and big banks that they poured it into assets in an effort to create some positive yield, necessary for the pension funds and other investors that had built interest gains into their business models. The pension funds could not just put the money in the bank and earn interest — the interest rate was Zero and pretty much had been starting in 2009. The Feds had tried to raise the interest rate, but Covid put an end to that and we were back at zero. It was crucial, however, to avoid deflation during the two-year Covid shutdown.

The trick is to keep employment high, inflation at about 2%, and Federal interest rates at about 4-5%, but it’s like trying to manage a three-way see-saw. Right now, the economy seems to be strong and almost back to where it was before the pandemic, with robust employment. Jay Powell said, “We have essentially interest rates, the balance sheet and forward guidance, and they’re famously blunt tools. They’re not capable of surgical precision.”

What I really enjoyed about this very-readable book is learning about these three tools, what they do, what their unintended consequences can me, and the politics and drama that went into the policy. The abrasion between the academics like Ben Bernanke and those in the marketplace like Steve Mnuchin and Jay Powell is fascinating. It also made clear that fiscal policy is supposed to be made by Congress, such as allocating money to repair the crumbling infrastructure as a way to inject liquidity into the marketplace. But in the face of congressional gridlock, the Fed has been forced to try to play a symphony with its blunt tools.

The “quantitive easing” really boosted asset values, like houses and stock market portfolios, much of which was purchased with borrowed money. This increased the “wealth gap” between investors in the 1% and the rest of us. When interest rates go up, it is reasonable for investors to unload high-risk investments like start-up companies, so the stock market will go down. As interest rates go up and stock prices come down, highly-leveraged investors will face margin calls that will increase the speed of the market descent. This may lead to a very unhappy outcome in the mid-term elections later this year.

Excellent book. Highly recommended!