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BoE’s Rescue Mission At Odds With Fed’s Inflation Fight
Part of me doubts this needs restating, but given the historic nature of the circumstances, it's worth reiterating: Central banks don't want easier financial conditions right now.
In fact, it's not too much of a stretch to suggest that any session during which financial conditions ease represents a setback in the inflation fight. Wednesday was very instructive in that regard.
September 28, 2022, will be remembered as the day the Bank of England was compelled to intervene in the UK government b
Boe had no choice. The integrity of their whole financial system was at stake. There was a giant run on the bank gaining steam. They had to foam the runway. No choice. The nuances of monetary policy don’t matter when the entire system is at risk of collapse. The US learned that the hard way 08-10. Mario Draghi was artful in putting out a run on the euro in 2012. I hope that the peanut gallery does not prevent Powell from doing so should the time come.
Yesterday’s big stock market rally proves, unfortunately, that many market participants today have completely forgotten how to manage risk, and over the past decade the FOMC has dissuaded Wall Street from being concerned about risk. In short, many investors have mastered the art of basically not managing risk at all.
I think it’s very interesting that break-evens went up. One data point doesn’t make a trend, but it suggests a possibly interesting theme. As one central bank after another is forced into rock vs. hard place situations between markets and inflation, every time they choose markets, it translates into stickier inflation. The fact that the BoE really had no choice in the matter only supports the proposition that central banks will have no choice but to bow to modern market structure induced de facto easing.
Plenty of people have talked about how sticky inflation may well prove to be over the medium-term, but that has largely been for various supply-side structural reasons. Buckling banks adds an element of monetary policy demand-side inflation stickiness.