The Fed basically risked everything. They thought the changing world meant no more worries of surging inflation and actual tightening measures. Keeping the markets elevated became their unstated priority. They’re now on the wrong side of a losing bet, a predicament that became increasingly clear this week with Chair Powell’s beltway testimony. The Fed, understandably, is Under Fire for surging inflation.
It was not the Federal Reserve flinching this time, it was China’s central bank that caused the bounce on Friday.
The first 3 paragraphs of Doug’s article tell it all.
There is a monumental flaw in contemporary central banking doctrine, one not debated and seemingly not even recognized: it is perilous for central banks to manipulate the securities markets as their chief mechanism for managing financial conditions.
The bottom line: global Bubbles are fragile and increasingly vulnerable. In particular, China is a Credit accident in the making. And Fed policy certainty has been the glue holding things together – keeping the mania raging, keeping the leveraged players playing, keeping all the options and derivatives speculators betting on the long side, and keeping the weak dollar supportive of levered “carry trades” the world over.
I am going to pull the salient data out and print it up front… So my more simple conclusion is that our financial system is FUBAR.
In other words, the labor market is tight today. Are we really worried about filling all the below-living-wage burger-flipping unfilled jobs? For reference, 5 million jobs paying $20K a year ($10/hr) comes to $100 Billion in wages a year – the Fed is printing $120 billion per month to monetize the stock market.
After such a historic year of monetary inflation, efforts to pull back will expose myriad fragilities. Unparalleled debt and speculative leverage in a backdrop of rising inflation risk and more cautious central bankers create a high-risk backdrop. Toss in an epic speculative mania in equities, derivatives trading, cryptocurrencies and the like, and it’s difficult to envisage an environment fraught with greater risk. All eyes on the global leveraged speculating community.
Noland comment: I abhor historical revisionism. “Rates were very low. They were at zero for seven years… During that we didn’t see… excess buildup of debt. We didn’t see asset prices forming to bubbles… We didn’t see a housing bubble.”