Making Sense of the Fed’s Monetary Policy Experiment

Making Sense of the Fed’s Monetary Policy Experiment

Cyrus Amini shares his thoughts on what could go wrong (and right) from here.

Reviewed by: Kent Thune
Edited by: Ron Day

Cyrus Amani HeadshotCyrus Amini, recently named chief investment officer of Helium Advisors, leads the firm’s investment team and oversees risk management, while guiding the investment committee and helping clients with asset allocation, fund selection, and fixed-income positioning.

Jeff Benjamin: How concerned should investors be about the current state of U.S. monetary policy?

Cyrus Amini: Investors have been concerned about monetary policy and what the Fed will do next for some time. The primary concern we have now is the difficulty of balancing monetary policy while the government runs large deficits. The Fed is constrained in raising rates by the country’s ability to pay interest on the massive amount of Treasurys outstanding. It’s a difficult situation even when the economy is doing fairly well.

JB: What more can you tell us about the unprecedented experiment of Fed policy?

CA: In order to restore order in financial markets after the subprime crisis, the Fed asked for authority to roll out a number of emergency policies. Those solutions helped avoid even more pain in 2008 but were continuously applied until 2022. This resulted in a staggering amount of artificial liquidity in asset markets, partly measured by the size of the Fed’s balance sheet, which is approximately $7.5 trillion today.

This kind of market intervention hadn’t been seen since the early 20th century. The experiment kept global real rates at zero for a decade and added trillions of extra capital to markets. The major central banks have backstopped asset markets while maintaining an unhealthy real policy rate of 0%. This impacts both capital movement and healthy economic development.

JB: What is the path out of this monetary policy experiment?

CA: Most recently, we have seen Europe fail to escape the quantitative easing black hole via austerity measures. Historically, once economies pass the 100%–120% debt-to-GDP ratio, the math becomes extremely difficult to fight. The standard tool in modern history has been to try and inflate away the debt. I find it difficult to see how the U.S. can pursue that policy without suffering significant economic damage, even with our position as the world’s reserve currency.

The first step is to continue quantitative tightening and get central banks out of asset markets. The second step is to maintain a realistic policy rate for as long as it takes for markets to normalize.

If policymakers don’t step up to craft structural solutions to economic issues, this path will be even more painful for all of us.

JB: Where are you seeing investment opportunities in the fixed-income space?

CA: The increase in interest rates has hit many fixed-income strategies and forced investors to sell some paper at steep discounts. We are seeing some compelling opportunities in both the U.S. Treasury and municipal markets on both taxable and non-taxable bonds.

Our focus is on the short to intermediate area of the maturity spectrum, as the curve is quite flat from 10 to 30 years. Any market where there are forced sellers is typically one where opportunity can be found.

JB: Is there a black swan type event that keeps you awake at night?

CA: Absolutely. I continue to believe that markets are downplaying the probability of a major breakdown in the Chinese economy. The combination of aging demographics continued shifts in direction on both economic and foreign policy, as well as an opaque relationship between government and asset markets has left China in a vulnerable position.

I would be focusing less on Taiwan and more on economic developments on the mainland. Without the delivery of financial success or continued progress for the masses, China’s President Xi Jinping and the Chinese Communist Party could lose control much faster than most outsiders believe possible.

Contact Jeff Benjamin at [email protected] and find him on X at @BenJiWriter 

Advisor Views is a bi-weekly Q&A-style series that features voices from across the financial planning industry sharing insights on investment strategy and portfolio management as it relates to the current economic environment.

The format enables advisors to respond in their own words to specific questions designed to provide readers with practical tools and tactics that can be applied to managing client portfolios.