2023: The Fed Declares Victory; 2024: The Year of Hubris and Nemesis

January 1, 2024

Are the crowds ready for the curtain of Fed omnipotence to be pulled aside? What will push markets ever higher if the Fed's alchemy fails?

For 15 long years, the Federal Reserve has conjured an economy and financial system without crisis or lengthy recession (setting aside that spot of bother triggered by the pandemic shutdown as a "bolt from the blue"), all with god-like mastery of the financial dials of bond yields, interest rates, vast purchases of mortgages, the subsidizing of the banking sector and the enlivening floods of liquidity that have elevated markets to extraordinary heights.

It is thus understandable that Fed Chair Powell declared victory in December 2023, having engineered the tricky maneuver known as "the soft landing" without crushing employment, spending, credit or markets.

We can easily imagine a triumphant parade of the Fed's leaders, each lauded as demi-gods of the financial realm. We can also sense the palpable confidence of the crowd, so greatly enriched by the Fed's mastery, that the Fed's mastery will continue unabated for another 15 years--in other words, essentially forever.

That was 2023. In 2024, things might turn out differently than the crowd expects, not because of the oft-dreaded Fed policy error but for reasons beyond the reach of financial machinations.

I speak of Hubris and Nemesis, not wonky policy errors. In the glory years of the Roman Empire, triumphant parades celebrating victorious generals were said to feature a charioteer who followed the general, whispering (or perhaps shouting over the cacophony of the crowds) Respice post te! Hominem te memento!: "Look behind you! Remember you are only a man!"

In other tellings, it is a slave who is ordered to shadow the victorious leader, whispering Memento Mori, "Remember, thou art mortal."

The point of the story is that hubris--excessive pride and confidence in one's power and victories, excesses that breed complacency--offends the gods, especially the goddess Nemesis, the "dispenser of dues," who relishes delivering retribution on the prideful for their undeserved good fortune.

In other words, 15 years of victories and glory has undoubtedly attracted the scornful attention of Nemesis. How Nemesis might exact her dues is of course unknown, but we can anticipate that the sources of excessive pride and confidence in one's power will fail the Fed in unexpected ways: perhaps the Fed will fiddle with the dials in the same fashion that yielded one victory after another, only this time the results will be chaos rather than calm and defeat rather than victory.

The entire field of economics is ripe for a rebalancing visit from Nemesis to dissipate the illusion of god-like powers bestowed by financial alchemy. We have been lulled by the declarations of victory into believing that all that's needed for permanent prosperity is the right mix of top-down financial policies: a subsidy here, a tax break there, all floated by a tsunami of Fed liquidity--the unequaled magic holding the entire financial Empire together.



Are the crowds ready for the curtain of Fed omnipotence to be pulled aside? What will push markets ever higher if the Fed's alchemy fails? All that gold created out of base metals by the Fed might be revealed as nothing more than a paper-thin coating of gold over bars of lead.

In our hubris, we reckon the alchemy of finance gives us god-like powers. That's the ideal setup for a takedown by Nemesis.

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