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?
Silicon Valley Bank (SVB) is not Lehman Brothers, but we can make uncomfortable comparisons.
The consequences of decades of unsound money are coming home to roost. Our nation is hopelessly divided in an increasingly decoupled world. Predictably, inflation and Bubbles are sowing inequality, insecurity, hostility and conflict – at home and abroad. Trust in critical institutions continues to wane. The costs associated with this epic policy failure will be enormous – possibly catastrophic.
Expectations that inflation conveniently returns to previous cycle dynamics is wishful thinking. Hopes that central bankers can quickly conclude tightening cycles without the need to inflict pain are unrealistic.
There was further evidence this week that loose financial conditions are working their magic.
Once unmoored, inflation tends toward a cycle of unpredictability and destabilizing volatility that can extend for years and even decades
If Powell is at this point compelled for more than push back lip service against the markets’ loosening of conditions, it will take something akin to his November 1st hawkish beat down.
Market optimism is likely a false dawn, and the big cross asset short squeeze could certainly prove one dazzling flash in the pan. But financial conditions this loose should not be ignored.