It’s not a close call. If the Fed “Skips” policy tightening at the June 14th FOMC meeting, it will be yet another big policy mistake. The long string of errors has greatly damaged the Federal Reserve’s inflation-fighting credibility. It has also pro…
The bottom line: Global financial conditions remain loose. This has been good news so far for risk assets; not so much for containing inflation.
Bonds and stocks rallied immediately on the release of CPI data, with television analysts scurrying to try to explain the spirited bullish market reaction. The explanation was in market positioning, rather than in data minutia.
For years, we’ve been told the banking system is sound and highly-capitalized – that lessons were learned from the 2008 crisis. Importantly, the Fed would lean on “macro-prudential” measures (i.e., regulation) to safeguard financial stability. Our system last month suffered two of the three largest bank failures in U.S. history.
I worry about China’s “Plan B”. Beijing is clearly preparing its military and people for confrontation with the U.S., a conflict I fear will be increasingly likely when China’s economic gambit falters.
With bank lending tightening, it seems prudent for the Fed to hit the pause button. The problem is that markets eagerly anticipate the day the Fed backpedals from its inflation fight at the first sign of instability.
A Bubble maintaining an inflationary bias will demonstrate a powerful response to stimulus. Importantly, however, as this same bubble deflates, it will develop increasing resistance to stimulus measures.
The Powell Fed today confronts a historic dilemma. And it is uncomfortably reminiscent of how Federal Reserve officials faced in 1929 a confluence of a weakening economy, a fragile banking system, and a crazy stock market speculative Bubble.
With Credit Suisse’s troubles supposedly an anomaly, markets were hopeful a European banking crisis had been quickly nipped in the bud.
Not so fast.
So, Washington will bail out wealthy depositors at SVB and Signature and deny the same treatment to depositors when more traditional banks begin to fail?
