Rate Hike Threats, Surging Inflation Dominate Headlines
Traders are increasingly convinced that surging prices will force central banks to tighten. And posthaste.
Comments from Andrew Bailey over the weekend and a hot inflation print out of New Zealand stoked rate hike bets and pushed up yields Monday in a fairly dramatic bout of bear flattening.
During a virtual panel discussion, Bailey conceded that central banks can't combat the supply chain bottlenecks contributing to surging input prices, but forcefully suggested that policymakers should act t
Don’t worry, any engineered recession will be transitory 😉
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So the choice for CBs, according to Mr. Bailey, is to do nothing (a bout of stagflation) or raise rates into a slowing economy (engineered recession). Given the amount of leverage in the system, which of these is likely to result in a black swan event?
Unfortunately at this point I think both. If they keep the support up then inflation keeps growing as the scarce resources demand higher and higher prices. In which case shortages of goods becomes very painful for many. OR they could hike rates and engineer a recession which due to the extreme leverage in the system would destroy lots of theoretical wealth and likely result in some perverse results as demand tanks and the global supply chain cuts capacity further. This would be extremely painful for many.
The issue is at this point it’s kind of like debating which way you should adjust rates to deal with a literal gunshot wound… it’s not actually going to address any of the fundamental issues. Policy is what we need. We need sustained investment in onshoring and incentives for making supply chains more robust. We need laws that prevent prioritizing shareholder value on a daily basis over basically any other value. We need infrastructure investment. We need to update the education system. We need to provide meaningful debt relief. We need to build sufficient affordable housing. And on and on. None of which interest rates going up or down will do.
“as demand tanks and the global supply chain cuts capacity further“
Wealth destruction may dent the marginal consumption of the wealthy but what about for those without wealth?
K shaped inflation shows that demand is outstripping supply for necessities. Food, autos, energy, housing. It’s hard (though not impossible) to destroy demand for those through interest rate policy. And if demand for those products doesn’t tank why would capacity be reduced?
Inflation, when measured in pounds and in the UK, is a serious concerns. Brexit has adversely affected the UK and will continue to do so. As for the dollar, I don’t think inflation is as serious a concern. Why does anyone care about the UK and BOE? They are in a special situation and are becoming less and less important to the world economy.
I harbor a nostalgic concern for what is happening in the UK but cannot ignore the fact that Brexit was a self-inflicted wound and pray that the post-Brexit fallout serves as a cautionary tale for policymakers here.