Markets are being Lulled into a False Sense of Accommodation

Those who take an interest in the actions of central banks will know that the advent of Brexit and Donald Trump’s presidency has seen the direction of monetary policy gradually change in both the UK and the U.S.

Since the EU referendum, the Bank of England have raised interest rates twice, after initially cutting them and implementing a new round of quantitative easing in the aftermath of the vote. The first rate hike in November 2017 came over a decade since the bank last increased rates in July 2007.

A month after Donald Trump was confirmed as the 45th American president, the Federal Reserve raised rates for only the second time in nine and a half years. Since Trump’s inauguration, they have gone on to hike a further seven times, and over the course of eighteen months (starting late 2017) the Fed have rolled off over $600 billion in assets from its balance sheet.

As the Fed continue to roll off assets until their balance sheet ‘normalisation‘ programme ends in September, the sentiment amongst traders is that the central bank will soon begin a course of rate cuts in order to stave off the threat of a recession as the prospect of a full blown trade conflict with China and other nation states gathers momentum.

A similar sentiment can be found in the UK over Brexit. With the British economy stagnant and manufacturing and construction sectors in decline, there exists an expectation that the Bank of England will ultimately reverse course if an economic downturn takes hold.

There is what you might call a precedent for this. The BOE and the Fed cut rates to near zero percent in the midst of the 2008 financial crisis. Surely they would seek to accommodate markets again in the event of another breakdown? In my view this is a dangerous assumption to make.

So as not to arouse widespread suspicion for their actions, central banks have embarked on a carefully regimented programme of increased levels of communication over the past few years. To quote Bundesbank President and Chairman of the Board at the Bank for International Settlements, Jens Weidmann, communication has become an ‘instrument of monetary policy‘.

You may have picked up on how since the Fed raised rates in December 2015, they along with the Bank of England have only adapted monetary policy when a meeting has coincided with a press conference afterwards. The BOE carried out their post referendum rate cut and two subsequent hikes when delivering their quarterly inflation report. Likewise, the Fed have announced each interest rate rise in line with their own quarterly summary of economic projections. They used the same setting to announce their balance sheet reduction scheme in 2017.

Whilst the Bank of England only communicate monetary policy directly when issuing an inflation report, the Fed as of January 2019 now hold a press conference after every FOMC meeting. This has opened up the possibility that any of the scheduled eight meetings per year could be construed as ‘live‘ meetings, meaning monetary policy could change more regularly now that the channels of communication have been expanded.

So far, decisions emanating from the BOE and the Fed since 2015 have proven predictable. This is due to more regular media interaction from members of the central banks, which typically increases in the run up to an interest rate decision. Traders and the public alike have yet to be taken by surprise from any interest rate move over the past four years. All decisions were telegraphed weeks in advance.

As Jens Weidmann has commented, ‘communication serves to steer expectations‘. We saw a clear example of this before the Bank of England raised rates in 2017. In the months prior, numerous members of the bank’s Monetary Policy Committee took to the airwaves, appeared on television and gave speeches to acclimatise people to the fact that rates were about to rise for the first time in over ten years.

We see the same process in motion today.

Beginning with the Bank of England, last week chief economist Andy Haldane wrote in The Sun newspaper to warn that a further rise in interest rates was edging closer.

For me personally, the time is nearing when a small rise in rates would be prudent to nip any inflationary risks in the bud.

With spending by both households and companies picking up, that could put at risk the Bank of England’s 2% inflation target – with upward pressure on prices eating into pay and savings.

As reported by several outlets, Haldane’s assertion is that inflationary pressures will mount once the uncertainty over Brexit negotiations are resolved. I first wrote back in January 2018 that the BOE’s mandate for 2% inflation has become central to their justification for tightening policy, whereas in the years that followed the 2008 crisis they allowed inflation to rise to a high of 5.5% without raising rates. Instead, they carried on pumping more artificially created money into the system, despite inflation running over 3% above target.

The situation now is different. As uncertainty over Brexit intensifies along with the prospect of the UK leaving the EU with no withdrawal agreement, the BOE remain steadfast that they will conduct monetary policy in line with their mandate for 2% inflation.

To support this thesis, governor Mark Carney appeared before the Treasury Select Committee in September 2018 and gave a very frank assessment of what would most likely happen in the event of a ‘disorderly‘ Brexit. Discussing the possibility of a no deal / no transition scenario, Carney said:

In the scenario you’re discussing, you have a potential exchange rate impact and a direct tariff pass through impact, and potentially some supply disruptions.

We have a very clear remit to bring inflation back to that 2% target. From a monetary perspective, we would look – subject to our remit – to do what we could to support and ease the adjustment. But there are limits to our ability to do so.

This scenario we’re talking about is quite an extreme scenario. It’s very easy to see a case where those tolerances would be breached and policy would have to be tighter not looser.

Does this sound like a central bank that will backstop the fallout of a no deal outcome, and in so doing abandon once again its inflation remit? I would contend not. 3% inflation was the limit for the BOE when they raised rates in 2017. Judging by their own analysis, they anticipate inflation to rise to over 6% off the back of no deal.

Should they remain committed to their 2% mandate, as I believe they will, rates are only going one way.

Markets and mainstream economists have called Carney’s bluff. They do not believe that the Bank of England would raise interest rates in the wake of a no deal outcome. It is a position based on hope rather than actual evidence. The question they have neglected to ask is why amidst Brexit uncertainty the bank remains resolute behind it’s inflation mandate, whereas in the years previous it did not garner the same level of importance.

As I have remarked before, you either have a recognised mandate for inflation, or you do not. What the Bank of England are doing is turning on the relevance of inflation targeting when the time suits.

Whilst UK markets expect the BOE to accommodate a ‘hard‘ Brexit, the U.S. expects the same out of the Federal Reserve when it comes to trade tariffs. Earlier this month a comment from Fed chairman Jerome Powell was widely interpreted by traders as a sign that the central bank was about to cut interest rates.

Here is what Powell said:

We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labour market and inflation near our symmetric 2 percent objective.

Note how Powell referenced the Fed’s objective for 2% inflation. In reality, this is not a clear indication of an imminent reversal in monetary policy. It has more in common with the position of the Bank of England, who have long communicated that rates could move either way over Brexit depending on the inflationary ramifications.

Nevertheless, a majority of the mainstream and independent media have chosen to ignore this. Instead, they are promoting the falsehood that the Fed has already reversed course, even though the bank continues to reduce its balance sheet and interest rates have remained static for six months.

There is a simple dynamic at work here. Trade is the one entity that connects the UK’s withdrawal from the EU and the tariffs imposed by the Trump administration. An economic consequence of both will prove to be a rise in inflation, to levels that comfortably exceed the BOE’s and the Fed’s 2% mandate.

One argument is that both central banks will ultimately cut rates to zero – perhaps even to negative territory – and fire up quantitative easing again to maintain the false recovery narrative that grew out of 2008.

What this argument does not factor in is how the rise in populist and nationalist sentiment over the past few years is providing central banks with adequate cover for their actions. By choosing now to thrust their inflation mandate to the forefront of their remit, they are saying to markets that there is only so much we will tolerate before being forced to take action.

As for how political protectionism could benefit globalists, former Deputy Director of the International Monetary Fund, Mohamed El-Erian, suggested back in 2017 that the growth in populism and nationalism could provide the impetus to ‘revamp’ the IMF’s Special Drawing Rights basket of currencies.

Now we begin to see a vision for how Brexit and the Trump administration work in favour of global planners. Their own communications, for which are plentiful, present a clear agenda for the future implementation of a global currency framework within the next decade. Such a framework could only be achieved by diminishing the current standing of national currencies, notably the dollar and sterling. The role of sterling as a reserve currency has already been called into question as a result of Brexit. The world reserve status of the dollar is also coming under greater scrutiny.

Assimilating currencies through the IMF’s SDR would act as a pathway towards the creation of a global currency that transcends national boundaries.

By using the metric of inflation in accordance with their mandates, central banks have the ability to engineer a financial collapse and escape culpability for their actions.

Backstopping Brexit and Trump would not assist the globalists with their ambitions. I do not believe that maintaining the system in its current guise is the goal. Allowing a crisis to develop off the back of nationalist and populist movements would play directly into their tried and tested method of using chaos as opportunity.

Central bank communications have deliberately kept alive the possibility that monetary policy will further tighten as the actions stemming from Brexit and Trump’s presidency advance. If and when this happens, in contrast to what analysts and the public currently expect, no one can say that they were not warned.

10 comments

  1. This is a contrarian pov to what most market analysts are predicting these days.However, after reading of Guinness’ observations and thoughts on those observations his take makes complete sense over the longer time frame and the goals of the international globalists with their ‘New Financial World Order’ as expressed by the Tri Lateral Commission decades ago at a conference they held on that topic.

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  2. “Markets and mainstream economists have called Carney’s bluff. They do not believe that the Bank of England would raise interest rates in the wake of a no deal outcome. It is a position based on hope rather than actual evidence.”

    Hi Stephen,

    There is a very good reason the markets and economists ignore Mark Carney – because he has been proved to be a liar and a charlatan on numerous occasions since his appointment, he has repeatedly warned of imminent rate increases that never materialise and is now a complete laughing stock(you may have heard he has been nicknamed “the unreliable boyfriend”), he and the Bank of England have now zero credibility and have been shown to only focus on the housing market as their barometer of the UK’s economic health, they have along with the UK government provided stimulus to the market to ensure prices keep rising as the UK property bubble presents an enormous risk to their member banks who still remain insolvent following the GFC in 2008(all hidden off balance sheet). He is also an arch remainer and is obviously working with the government to ensure BREXIT never happens – his term was even extended when BREXIT talks went past the numerous deadlines.

    His “project fear” comments regarding unemployment and the economy in the event of “Leave” vote have since been disproved – the economy has grown and unemployment has fallen. Ever since the referendum went the “wrong way” he has repeatedly made negative comments on the UK economy and its prospects at the time of the announcement of economic statistics reports in order to put further downward pressure on sterling.

    This is why the markets expect him to cut rates in the event of a “no deal BREXIT”, thus adding to the collapse of sterling and putting more political pressure on the UK government to rejoin.

    The globalists made a huge error when they gave the British public the referendum, they will never allow such a threat to the European Union to happen again, and I believe that in the unlikely event that we actually do leave(i.e hard BREXIT) they will use the ensuing currency crisis to ensure the UK rejoins with such unfavourable terms it will be hobbled economically for good(see Greece) and also will have to adopt the Euro as part of the conditions of rejoining to make absolutely certain that leaving in the future is never an option that can be considered.

    Regarding the Fed and your reasoning that the Fed is also going to stick to its mandate and refuse to cut rates, you seem to either be ignorant of the facts that happened last Christmas or in complete denial of them, when the Fed, presented with a 20% decline in the stockmarket in just a few weeks( and that phone call from Steve Mnuchin from Cabo San Lucas) went from saying rates were far from neutral and going to raise rates three or four times in 2019 to saying they were going to be “patient”, subsequent comments have proved the Fed policy is now exclusively determined by Wall Street, and their increasingly desperate interventions on the slightest dip are now so blindingly obvious, that nobody hardly mentions them.

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    • Hi Kevin,

      Thank you for taking the time to reply.

      Starting off with Mark Carney, I wrote a three part series at the start of 2018 on why the Bank of England needed Brexit to raise interest rates (https://stevenguinness2.wordpress.com/2018/01/10/why-the-bank-of-england-needed-brexit-to-begin-raising-interest-rates-part-one/). I traced the BOE’s actions and statements back to ten years ago, including the times when Carney suggested around 2014 that rates may soon rise. He was always careful to preface potential changes in monetary policy as an ‘expectation, not a promise’.

      The same applied to warnings of a leave vote in the referendum. He said there ‘could’ be a material economic impact, not that there would be. As much as I dislike Carney, it’s important to give an accurate depiction of his commentary. One thing I will say is that his assertion of a steep decline in sterling and a subsequent rise in inflation were entirely accurate.

      If a no deal exit comes to pass, I will wager with you now that the Bank of England will not be held culpable for their policy response. Ire will almost certainly be exclusively directed at a Boris Johnson led government (assuming he becomes PM next month). If the BOE keep up their stance of monetary policy being tied to their 2% inflation mandate, then for me this would be an indication of rates moving higher, not lower.

      As for the globalists making a ‘huge error’ by allowing the referendum to take place, I think this is a misguided assumption. I have presented evidence to support this in numerous articles over the past couple of years.

      One aspect of your comment struck me the most. You were suggesting that as punishment for leaving with no deal, globalists would work to ensure that a collapsing pound and depressed economic conditions following exit would be used as a rationale for the UK to rejoin the EU in the future and in so doing adopt the Euro. You said that this would make ‘absolutely certain that leaving in the future is never an option that can be considered.’

      Rather than see it as punishment, I would look upon that as potentially their goal from the beginning. Say if globalists wanted to assimilate the UK into the Euro framework, then they would need a crisis in order to move things in that direction. Because sterling is so sensitive to Brexit, the UK’s departure is perfectly placed to be that crisis. Out of everything connected with Brexit, sterling is a my primary concern. The globalist’s agenda for a world currency is no secret. To achieve it would require the diminishment of existing FIAT currencies. This is where sterling’s role as a reserve currency comes in. Wide-scale economic damage, severe devaluation of the pound and loss of reserve status could all be used in future as reasoning to take the UK back into the EU fold (most likely under a centrist / remain coalition). I would want to see how things play out first though before engaging with that prospect further.

      On a final note, I’m fully aware of what happened last December in regards to U.S. markets. I would caution that all the Fed have done since they raised rates last Christmas is talk. Rhetoric is no substitute for actions. The fact is, the Fed have not loosened policy at any point over the last six months, and have given no specific assurance that they will lower rates off the back of economic decline. And I could not disagree more that Fed policy is ‘exclusively determined by Wall Street’. Central bank policy is directed from the Bank for International Settlements. It’s one reason why central bank behaviour is often coordinated.

      Wall Street thrives on believing it is a ‘forward looking indicator’. But as Wolf Richter at Wolf Street has made a strong case for, markets rarely if ever accurately predict what the Fed are going to do so many months down the line. They are living in hope that the Fed reverse course. With Trump in the White House, I doubt they will.

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      • Hi Stephen,
        You raise a lot of issues here so I will deal with them one by one:

        1.You say the Bank of England need BREXIT as a cover to raise interest rates, I said in the event of a no deal BREXIT they would cut rates in order to put further downward pressure on sterling and possibly create a run, here if any proof were required is the man himself confirming it to MP’s:

        https://www.ft.com/content/ebfd3b32-9811-11e9-8cfb-30c211dcd229

        2.You defend his statements regarding the steep decline in sterling and inflation were correct – but that just again proves my points that if he and the MPC were doing their job and raised rates as they promised prior to the referendum(following which he actually cut them!!!!) sterling would not have declined as much and inflation would have been measurably lower.Also as I pointed out in my original post, he has done everything possible to talk sterling down at every opportunity.

        3.”If the BOE keep up their stance of monetary policy being tied to their 2% inflation mandate, then for me this would be an indication of rates moving higher, not lower.”

        The Bank of England chose when to adjust monetary policy on a whim, to the point of even ignoring their own targets when it suits, following the GFC, Mervyn KIng allowed inflation to rip to 5.3% and simply said they weren’t going to act as he considered it “temporary”, also don’t forget Carney repeatedly promised interest rates would go up when unemployment fell to 7%, when that happened he moved the goal posts to say the decision would be based on a number of factors:

        https://www.bbc.co.uk/news/av/business-26157942/mark-carney-changes-bank-of-england-interest-rate-policy

        4.”As for the globalists making a ‘huge error’ by allowing the referendum to take place, I think this is a misguided assumption. I have presented evidence to support this in numerous articles over the past couple of years.”
        And so have I, Theresa May has wasted three years trying to negotiate our remaining in the EU, and ending up with a deal that is so bad, it is worse than remaining on our present terms! She guaranteed defeat from the start by agreeing to pay the £39bn ransom up front with no conditions and told them she didn’t want to leave without a deal, thus ensuring the EU never had to compromise or concede on any of the conditions in “negotiations.”
        Negotiations is a bit of a misnomer I think – a surrender document is more accurate.

        5.”This is where sterling’s role as a reserve currency comes in.” I don’t think sterling is important as a “reserve” as it only comprises around 4.5% of international reserves and if replaced by the Euro(which is 21% of international reserves). If replaced it would make leaving the EU in future virtually impossible as the massive changes politically would be further compounded by the economic disruption of changing back – that is why it will be done – a knockout blow to ensure the UK never ever leaves or tries to leave ever again.

        6.Draghi has said rates were expected to remain constant until the first half of 2020 before they would RAISE them with the bias on RAISING rather than cutting, until the other week when he also did a complete u-turn just like the Fed in December 2018 and Carney has done on so many occasions people no longer even notice(hence the unreliable boygriend moniker), he now says:

        “in the absence of improvement” of inflation, additional stimulus will be required, in form of further cuts in policy interest rates and additional bond purchases”, and how “in the coming weeks, the Governing Council will deliberate how our instruments can be adapted commensurate to the severity of the risk to price stability,” and that “all these options were raised and discussed at our last meeting.” (Translation:Rates are going lower and QE is being ramped up!!!!).

        So we now have THREE central banks going back on their “forward guidance” of raising rates and yet you still think they are going to now do another U turn and increase them!!!

        I simply cannot understand how you cannot accept that in the face of repeated policy shifts, lies and false signals, central banks will never raise rates – they simply cannot, investors predicted this day would eventually arrive and now it has, they are completely trapped, and they can jawbone the markets all they like, eventually they have to move and raise – or as events have now proved – simply issue new policies that put off raising rates to some time in the future – i.e NEVER!!!

        Gold has responded as investors have realised that these inflation targets are meaningless if interest rates can never rise, central banks now have a choice – raise rates and collapse the bubbles they have created and nurtured, or let inflation rip, history,gold and common sense say it is the latter.

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      • Hi Kevin,

        I’m going to get into this topic more in an upcoming article, but I’ll comment on a couple of things you raised:

        1) The FT article you linked as ‘proof’ that the Bank of England would cut rates after a no deal Brexit was not proof. To say it was is disingenuous. I could list a few news sources since the referendum where the bank have indicated the opposite policy response. I cited a clear example in my article above where Carney was very specific that if the ramifications of a no deal were inflationary, then tightening would be more likely. But as with your example, I accept that this is not proof in itself.

        Aside from his comment on stimulus being ‘likely’, here is what Carney said word for word last week:

        “In the event that there is no deal, the response would not be automatic, it would depend on demand, on supply and where the exchange rate went.”

        My feeling is that initially supply would be restricted and the exchange rate would fall heavily (I would not rule out parity with the dollar). But I think demand would take longer to be impacted. A no deal in October would happen just weeks before Christmas. Demand is always at its peak during this time. If we see a situation where demand outstrips supply and the pound is depreciating, inflation is guaranteed to rise. And if the BOE remain consistent with their communications since they began to raise rates, then their response will be to tighten.

        If they were to cut rates as you say they would, it would indeed cause further devaluation of sterling and perhaps prompt a run. But in those circumstances it would the BOE who the public would hold culpable. I highly doubt that they are going to place themselves in such a scenario. Every indication is that they will conduct policy in accordance to their inflation mandate.

        The culprits in the eyes of the public would be the likes of Boris Johnson and Nigel Farage. The sentiments of nationalism and protectionism will be held to account, not the Bank of England. I remember immediately after the referendum result when Carney addressed the nation amidst the political turmoil. He was roundly commended for what the media perceived as an assured and calm response. I believe the same would happen again in a no deal.

        2) I did not ‘defend’ Carney’s statements, merely I was putting them into context. And I will take that context further by saying that at no point did he or any member of the MPC ‘promise’ that interest rates would rise prior to the referendum. What they actually said was that it was ‘an expectation, not a promise.’ That’s a direct quote from Carney by the way.

        Another thing of note is that when the BOE cut rates in August 2016, they did so with inflation at 0.5%. If the UK drops out with no deal in October, inflation is going to be in and around the 2% level.

        3) I am very much aware of the Bank of England’s history on monetary policy since 2008. In my 3 part article on the subject, I focused heavily on how the bank allowed inflation to run as high as 5.3% whilst maintaining rates at 0.25% and ploughing on with quantitative easing.

        4) You say central banks will never raise rates. I’m rather dumbfounded by this. The Fed have raised them 7 times under Donald Trump. The Bank of England twice under Theresa May. You surely cannot be in denial of this? And why would it be a ‘U-Turn’ if they were to continue raising rates? You act like they have already reversed policy when they clearly have not. The reality is that they have not backtracked as so many in the media appear desperate to convince themselves of. To quote their own language back at them, they have ‘paused’ on raising rates further. And all too predictably markets have taken that as a U-Turn.

        I maintain that as the trade conflict initiated by the Trump administration intensifies, and the UK edges closer to leaving the EU with no deal, rates will remain on hold. I do not think they will cut rates in the near term. The belief that they will is based almost entirely on hope rather than reason.

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  3. I am closer to Kevin’s view here, but it is possible that raising rates and a financial crisis ( because clearly these will not be enough to attract investment and spending needed to maintain asset values) instead of lower rates and a currency crisis ( and then financial crisis) might be the direction chosen. The financial community, large business, and investors are obviously going to be closer to politicians and the BoE, and so I expect they will exert influence to maintain asset price levels. This would normally mean lower rates.

    We should not overlook that central banks have two channels at work. Traditionally rates were signalled by investor sentiment in the long end of sovereign debt, the yield displaying a mixture of inflation expectations and financial asset security. The US yield remains low, part of the unwind and increased supply of treasuries from the balance sheet possibly but I think there is more to it than that, treasuries being basically money with a yield supply is not so much the issue but wider expectations . Either way, a new QE in the UK might be used to push yields higher at the same time as rate rises. This seems counterintuitive because the effect of the two are contradictory in money supply terms , however if the aim were to support asset prices while reducing lending, to harden the currency while providing liquidity to the higher echelons of finance, this might be a choice. Asset values are much maintained by foreign investment and a currency crisis would see flight. Obviously I am thinking along the lines of how UK might try to reform into a new global(ist?) position this way, as opposed to choosing how to fold into any globalist direction, and having witnessed in Europe at just how “inventive” countries and finance can be at supporting asset values and existing distribution of wealth.

    I don’t really have a reply either way but I think that if/when brexit occurs this is where the new battle will be, the monetary and fiscal policy of UK, and it would surprise me if attempts at deconstructing the exit, or using it to further a globalist agenda, were not to take place.

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  4. Steven, yesterday there was FOMC meeting and in their statement it is mentioned:

    …uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.

    I think that rate cuts are on the table right now. How do you see it?

    Great article anyway, as always.

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  5. I’d be surprised if the Fed’s next move is to cut rates. Both the mainstream and the majority of supposed alternative outlets are fixated on the notion that a cut is coming as early as next month. Neither has made any concerted effort to ask what the Fed will do if Trump’s trade tariffs result in higher prices and a rise in inflation. In his press conference yesterday, Jerome Powell maintained that monetary policy will be conducted in accordance with their 2% mandate for inflation. I have little doubt that if we did see a spike in inflation, the Fed would raise rates again.

    If I’m wrong and they do cut in the near term, this in itself would likely help to spur inflation and set the Fed up for nullifying any reduction in rates fairly quickly. We saw this in the UK after the EU referendum. The Bank of England cut and reinforced QE measures, but just over a year later with inflation at 3% they raised rates.

    For me, most likely to happen is the Fed maintain rates where they are for now. They are still reducing their balance sheet, a process that they say will come to an end in September. If we see a major escalation in regards to tariffs, and perhaps an outbreak of conflict with Iran (something which could prove inflationary due to oil), the conditions would be met for the Fed to tighten just when markets and analysts think they will do the opposite.

    Something to ponder is how yesterday Powell commented that weaker global growth could pull down global inflation. But what if it does the opposite? What if instead of weak growth and low inflation we actually bare witness to an inflationary recession? That’s where my thinking is at present.

    Just to add to the Fed’s commentary on Wednesday, the Bank of England made it clear in their latest monetary policy summary today that in regards to Brexit:

    “The monetary policy response, whatever form it takes, will not be automatic and could
    be in either direction. The Committee will always act to achieve the 2% inflation target.”

    The only logical outcome from a no deal Brexit, which I believe will happen, is a resurgence of inflation. Based on when they raised rates in November 2017, 3% is their maximum level of tolerance before acting to raise rates. We’re at 2% now. A collapse of sterling and the immediate introduction of trade tariffs will ultimately pass through to prices. Depending on how severe any drop in the pound was, the BOE might not wait for inflation to tick up before tightening policy.

    In general, commentators are not taking the risk of an inflationary shock seriously. They blindly believe that no matter what the economic ramifications of Trump’s policies and Brexit, central banks will act to shore up the economy. Their communications in no way guarantee this. Come the end of the 2019, markets could well be in for a nasty surprise.

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  6. Hi Steven

    Could you comment on if, and how, would your conclusion change, if the US and Iran entered into a military conflict, involving Iran closing the Strait of Hormuz.

    Would that be a game changer?

    Thank you very much,

    John

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  7. Hi John,

    If any sort of conflict saw Iran close the Strait of Hormuz, the price of oil would rise substantially. Trump has already said that if Iran did that the Strait ‘would not be closed for long.’ Just today with news of a U.S. drone being blown out of the sky oil rose up to 5%.

    I’d imagine that the inflationary impact from higher oil prices would feed through to inflation reasonably quickly. It depends though how long any such conflict would last and whether the impact was temporary or longer term. It is definitely something that the Fed would factor into their communications.

    As for a policy response, I don’t think the Fed would move either way on rates initially. I have a feeling as well that conflict with Iran would also exacerbate trade tensions between the U.S. and China, particularly if China support Iran as they likely would.

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