Welcome to the Experiment Economy! The first experiment started some 10 years ago, as the Federal Reserve Board engaged in unprecedented quantitative easing in an effort to prevent a financial system meltdown. Universally considered a success by analysts, now it is time to for the Fed to engage in the second half of its experiment: reversing course. With a very long stretch of positive GDP growth and near full employment, the Fed is not only raising short-term interest rates, but beginning the great unwind of its balance sheet. The short run impact of asset sales may produce modest pressure on rates, while the ultimate impact on the economy and markets remains to be seen. It will likely play out over a long period of time.
Simultaneously, another great experiment is underway in the form of a large fiscal stimulus. With the Fed no longer underwriting the economy, the government is pitching in. Reversing the Keynesian playbook, Congress enacted a massive corporate and personal income tax cut and increased spending at (or near) the peak of the economic cycle. No doubt this is helping to extend the run of corporate profitability, and along with rising interest rates, a bull run for the dollar. Again, the long-term consequences are unknown. Those of us schooled in conventional economic theory are at least concerned, if not unnerved.