Bank of England Governor Andrew Bailey made a ridiculous comment almost two weeks ago and I’d be remiss not to mention it. Bailey issued his own FORWARD GUIDANCE on how to slow the pace of inflation. He suggested that people refrain from seeking big pay raises. It’s astounding that a sitting member of the G-7 Finance Group has the temerity to restrain the AVERAGE WORKER while promoting QE policies that have stoked a serious rise in asset prices for those who own antique autos, stocks, precious metals, art, multiple homes and any other asset class on the planet.
Mind you, at the last BOE meeting the Board decided to boost rates by 25 basis points in an effort to curb inflation, but failed to begin shrinking its balance sheet, which would lessen the liquidity needed to sustain the heavily leveraged based asset bubbles. More notably, the BOE vote to raise rates was 5-4 with Bailey voting with the majority. The four NOs were all in favor of raising rates by 50 basis points, which would have been a market surprise. Governor Bailey, haven’t you already harmed the U.K. middle-class enough with lower for longer and a BLOATED BALANCE SHEET?
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This is a perfect example at how central banks are in grave danger of losing their CREDIBILITY. Asking the middle class wage earner to be BURDENED WITH MORE PAIN is certainly representative of Henry Potter. Governor, you sir, are no George Bailey.
Speaking of central bank incompetence, Robert Armstrong had a piece in the Financial Times titled, “What the Fed Might Think About QT and Is the Bond Market Just Stupid?” In it, he cited former Fed researcher Claudia Sahm, who asserted that the Fed is “very uncomfortable with the balance sheet … they don’t know why it works or how it works. They don’t have enough data points on this working well. They can’t talk about that much in public because they don’t want to unsettle markets or themselves.”
THE IDEA THAT THE FED DOES NOT HAVE A CLEAR GRASP OF WHAT EFFECT BUILDING A $9 TRILLION BALANCE SHEET HAD ON AN ECONOMY — OR WHAT EFFECT SHRINKING THAT BALANCE MIGHT HAVE — IS UNSETTLING. SO WHATEVER VAGUE COLLECTIVE PRESUPPOSITIONS THE FOMC DOES HAVE ABOUT ITS BALANCE SHEET OPERATIONS ARE IMPORTANT TO MARKETS GIVEN THE IMMINENT SHIFT FROM EXPANSION TO CONTRACTION.
On Wednesday, the EQUITY markets and other assets rallied strongly after the release of the FOMC MINUTES as there was very little to support the hawkish stance of Atlanta President Rafael Bostic and his suggestion to begin Quantitative Tightening with a $100 billion a month drawdown. We at NOTES FROM UNDERGROUND have maintained a bullish outlook for precious metals, commodities and other assets as long as the FED was slowly raising rates. (Slow, meaning sustaining a steep NEGATIVE REAL SHORT-TERM YIELD without shrinking the balance sheet in any aggressive manner.)
As noted in the latest podcast with Dr. Faber, QT would be the area in which the FED WOULD DISCOVER HOW MUCH LEVERAGED EXISTED ACROSS MYRIAD ASSETS RAISING THE IDEA OF SYSTEMIC RISK AS THE OVERLEVERAGED BEGAN RAISING CASH. The FED has created a very difficult situation for itself as it confronts the global problem of inflation.
There is no fear of raising rates for the FED will go slow as Paul Volcker has left the stage and the structure of U.S and European debt is far too fragile to sustain a REAL OVERNIGHT BANK YIELD THAT IS POSITIVE. Old Man Potter can be found on Threadneedle Street but Jerome Powell prides himself on concern for “those who have been financially harmed through no fault of their own” so what would George Bailey Do?
More importantly, the White House is pressuring the FED to gain control over headline inflation before the midterm elections, so what policies can the central bank deploy to slay the rampant price increases? Watch for WAGE and PRICE CONTROLS BY JUNE. It’s always about the optics when George Bailey confronts Henry Potter.