End of Easy Money: Bank of England Talks Tightening amid “Altered Consumer Behavior,” Visions of Persistent Inflation

“It’s appropriate” that markets price in “a significantly earlier path of tightening than they did previously.”

By Wolf Richter for WOLF STREET.

Inflation in the UK has shot from below 1% earlier this year to 3.2% in August, the highest in 10 years, with core inflation – excluding food and energy – hitting 3.1%. OK, there was some “base effect” due to the very low inflation rate a year earlier. But the current spike of inflation, as measured by the last six-month average inflation annualized, is already at 4.5%, unrelated to the base effect. An annual inflation rate of 4.5% would be the highest in decades. In September, the Bank of England hiked its forecast for annual inflation by the end of the year to over 4%.

While this is still lower than the red-hot inflation in the US, it is way above the Bank of England’s target of 2.0%.

And the BoE is getting worried that the underlying trends are persistent, instead of temporary, that they’re getting embedded in the economy, and that they will be hard to dislodge through monetary policy once they’re embedded, and it’s making rate-hike noises a lot sooner than expected.

“Unfortunately, if you look at our last forecast, it [inflation] is going to go higher, I am afraid,” Andrew Bailey, Governor of the BoE and Chair of the BoE’s Monetary Policy Committee, told the Yorkshire Post in an interview. “As the Bank of England governor, I would prefer it not be there. But we are in very unusual times, and what I would say is we have to manage our way through these times,” he said.

“Obviously I am concerned with inflation above target,” he said. “We are going to have a very delicate and challenging job on our hands, so we have got to, in a sense, prevent the thing becoming permanently embedded because that would obviously be very damaging.”

A huge amount of focus was currently being directed to bring inflation under control, he said.

With the pandemic having altered consumer behavior, the economy had a “whole range of challenges that we are just going to have to deal with,” he said.

“We have got some very big and unwanted price changes,” he said

“This has been an almost unprecedented set of events. They are not over yet, that we are learning. We have to manage our way through them, and we will do that,” he said.

Pricing in the energy market indicated that inflation would be higher next year, as a price cap on consumers’ energy tariffs set by the regulator is expected to rise again next year.

“A huge amount can happen between now and then, so I am not going to speculate,” Bailey said, “but at the moment the forward curve would suggest that it would be higher, so that would suggest inflation persistence.

“So transience would be longer,” he said.

Financial markets are now pricing in the first rate hike later this year, after the BoE, in its last meeting, raised the possibility that it could raise rates as early as November.

Michael Saunders, a member of the BoE’s Monetary Policy Committee, told the Telegraph, “I think it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously.”

He’s concerned that capacity pressures and higher growth in wages are driving an increase in inflation that “could become more persistent unless monetary policy responds,” he said.

Huw Pill, the BoE’s new chief economist, said last week, the “balance of risks is currently shifting towards great concerns about the inflation outlook, as the current strength of inflation looks set to prove more long-lasting than originally anticipated.”

If the BoE raises its policy rate this year, far earlier than was expected just a couple of months ago, it would follow in the footsteps of smaller central banks in Europe and elsewhere that have already raised their rates, some of them already multiple times:

  • Bank of Korea: 1 hike, by 25 basis points
  • Czech National Bank: 3 hikes, by a total of 125 basis points
  • National Bank of Poland: 1 hike, by 40 basis points
  • Central Bank of Iceland: 3 hikes, by a total 75 basis points
  • Norges Bank (Norway): 1 hike, by 25 basis points
  • Reserve Bank of New Zealand: by 25 basis points.

This has all come a lot faster than expected this spring. And there are increasingly vocal concerns – such as by the BoE governors, but also among Fed governors and many others – that the notion of this inflation surge being “transitory” or “temporary” may not play out in reality.

There are vocal concerns that the underlying tendencies are an indication that this is going to be much more persistent, and is in the process of getting embedded in the economy, amid altered consumer behavior documented by their willingness and ability to pay whatever amid enormous fiscal and monetary stimulus. And tightening – or rather the removal of monetary stimulus, as central bankers will emphasize – is coming faster than previously expected. One of the biggest money printers, the Bank of Japan, has already stopped printing money

 

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  119 comments for “End of Easy Money: Bank of England Talks Tightening amid “Altered Consumer Behavior,” Visions of Persistent Inflation

  1. historicus says:

    I challenge, and everyone should challenge the premise that central bankers should promote any inflation, especially when they exist and are charged with “stable prices”. Inflation is a tax and central bakers have no right to pass taxes, especially when they peg interest rates well below.
    It is theft, plain and simple.

    • Jonathan Vause says:

      they’re doing what democratically elected governments want them to do, so you’re using a strange definition of ‘theft’

      • Truckman says:

        Your two comments are not necessarily at odds. The BoE is charged by the Government with stable prices, inflation is not that, and the BoE IS doing the Government’s bidding.
        It can still be theft if the Government is ultimately doing it, morally-speaking, but you will have a hard time prosecuting them since they write the laws ;)

        • char says:

          Stable prices does not mean no inflation. It could also mean a constant rate of (low) inflation. And there are so many advantages to say a 2% inflation over a zero inflation that it would be unlikely that the government would mean zero inflation with stable prices

        • historicus says:

          Char…

          Language is the first casualty in deceptions.

          Definition of “stable”
          Fixed, Unvarying, Permanent, Enduring, Anchored, resistant to change of position or condition;

          Your “take” is ridiculous. 2 -2.5% inflation, the Fed’s acceptable range…..RIPS 22 -28% off the dollar in ten years. Stable Prices?

        • char says:

          Prices are sticky. It is very hard to lower them. So with a little inflation you can still lower them without anybody noticing. Also inflation is something macro economics. Not true for individual items.

      • historicus says:

        What?
        They are mandated to definitve tasks which are integral to the powers they are allowed.

        The Fed exists to
        Maximize employment
        Promote stable prices
        promote moderate long term interest rates
        They FAIL in the second and third mandates

        The Fed is unelected by the voters
        Yet they pass an inflation TAX and they digitally mint at their own whim

        Both are Congressional Powers that can not be delegated. That is where the democracy lies. Congress answers to voters, not the Fed. Would a 2% tax on the holders of dollars pass a vote?

        And when inflation is SUDDENLY promoted and rates intentionally pegged below that rate, how else can it be descibed other than THEFT?

        For 7 decades fed funds equaled or exceeded inflation. Then 2008, and the theft began with Bernanke, then Yellen then Powell.

        • Truckman says:

          The BoE is not quite the same as the Fed.

        • DR DOOM says:

          Until the electorate demands congress quit the de-basement and transfer of wealth to congress members via the Fed nothing will change. Why would congress quit en-riching itself when the electorate does not care or knows what is happening ? Why would the Fed quit doing what it’s masters the congress demand for themselves, wealth, from the republics coffers.The electorate is told what is important. The electorate is told that the real problem is with their equally powerless countrymen’s behavior and beliefs they have . Since I am not a politician I can say what the politician thinks about the electorate but can not say. The electorate are suckers.

        • Bobber says:

          Right, the mandate of the Fed is stable prices, not stable inflation. The Fed is clearly disregarding it’s mandate.

          It’s just one of many deceptions/distortions we’ve heard from half-brained hacks.

          Remember these nuggets:

          QE is temporary. It’s used in “extraordinary” circumstances.

          The Fed’s balance sheet will be reduced.

          Interest rates will be allowed to normalize.

          The Fed will not tolerate inflation over 2% inflation.

          The Fed will not tolerate inflation averaging 2% over a period of years.

          The Fed will not tolerate inflation averaging 2% over a period of years, and unemployment is within an acceptable range.

          The inflation is transitory.

          We will use our tools if inflation ever runs higher than expected.

          Asset prices are not in a bubble.

          Bubbles are not foreseeable.

          There is no mortgage crisis (said two months before the mortgage crisis)

          We’ll never see a recession in our lifetime.

          The Fed doesn’t cause wealth concentration.

          We are independent from Treasury.

          We have no conflicts of interest. Our governors and board members do not engage in insider trading.

          We serve the public, but our board is comprised of banking CEO’s.

          Housing costs are rising at a moderate pace of 3% annually.

          Financial stability risks are low.

          Economic growth is strong.

          Government debts are not excessive because the interest is serviceable at today’s low interest rates.

          Now is not the time to worry about our national debt.

        • M Adam Smith says:

          The unelected bankers and financial gamblers on Wall Street caused the most severe crisis in modern US economic and monetary history. Congress would not allow the full amt of stimulus for the economy to recover – some say. And it’s true it was a slower recovery and mostly and first, benefitted the more affluent.
          In an attempt to recreate a more just recovery from the COVID-induced collapse, heavy stimulus was used with more directed at the average consumer.
          Here we are.

        • Bob Newhart says:

          A man with one job could feed a family of five in the 50s. The wife stayed home to take care of the children. Today that is impossible. If theft is only a penny a day is it still considered theft? If common sense was stolen could it be returned?

        • CJH says:

          Manipulating interest rates is a poor ‘tool’ to efficiently influence commerce, prices or employment. Central banks should not be the primary institution for this work. Treasury and the legislature are better positioned to maintain employment prices and inflation. Central banks are best a insuring that the checks get cashed.

        • Mark says:

          The theft began with Greenspan.

      • Augustus Frost says:

        It is theft, just another form of “legal”. If you are going to claim it isn’t, then anything is justified if determined by a “democracy”, no matter what it is.

      • Arthur says:

        Theft is theft even if a majority votes for it

    • char says:

      It is giving money to people who have more debt than cash + cash equivalent. And guess what: the rich have more debt than cash

      • historicus says:

        Bobber…
        and let’s not forget the THIRD MANDATE, carved from scrutiny with the “dual mandate” game.

        Third Mandate in the mission statement….”promote moderate long term interest rates”. What is the wisdom to this mandate? Moderate means “not extreme”. That means not too high…OR TOO LOW. Too high can be an obvious problem. Too low, not so obvious.
        Too low, immoderately low long rates allow current generations to steal from future generations with low cost and resultantly irresponsible debt creation. This allows the pulling forward of wealth to fluff the present, and burdens future generations without their approval.
        It is incumbent on every generation to pay its debts….but the forces pulling the strings on the Fed ignores this third mandate….in fact it doesnt even exist because we are constantly told about the “dual mandate”. Clever.

    • Kaleberg says:

      Inflation is the sign of a growing and changing economy. Prices are how information about rising demand is transmitted in a market economy. You can only get zero inflation when demand is more or less constant and the ratios of goods and services are invariant. This is Econ 101.

      Suppressing inflation is about suppressing growth and change. Too many very rich people benefit from the status quo and are terrified that any change is more likely to harm them than help them. They can arrange to suppress growth and innovation, so they do.

      • Wolf Richter says:

        Kaleberg,

        Nonsense. Inflation is the loss of purchasing power of the currency. And of anything denominated in that currency. Why does this long-debunked pro-inflation propaganda (inflation = growth) still circle around?

        • Yort says:

          I totally agree, and thus why the Federal Reserve can provide no historical or mathematical proof that “2% inflation” is best for any economy. The irony is it is a rounded number, simply pulled out of their arse to make it seem they have the situation under control. The only reason I can deduce to keep inflation above 0% is to “inflate away” the debt…paying back future debt with dollars worth less in the future than today. And the results of this experiment over the last 40 years (1980-2020) is playing out before our eyes in very predictable fashion…

          The other big “Monetary Myth” is that low interest rates help promote GDP. Look at a dot plot of 10 year Treasury Rates vs “Household spending as a % of disposable income” (Bloomberg lists this chart often). Over the last 40 years, it shows that consumers have spent the highest amount of their disposable income when the 10 year treasury yield was around 4.25%. Ironically, spending drops when the rates go BOTH higher AND lower than 4.25%. Being non-linear in nature, it is a hard concept for most humans to grasp as it breaks the basic rules of survival in our hidden “crocodile brains” that has allowed us to survive this long…

          The Fed knows this…they are just playing the short game to keep the system alive a little longer. It is human nature to allow things to get much worse before we make real changes, and it would seem the Fed is expediting this process…on purpose, anyone’s guess…

        • topcat says:

          Loss of purchasing power. OK. BUT I think that the questions you should be asking is, what is inflation and where does it come from. I believe that you will not be able to answer these questions. The FED does not control inflation, the fed is just as surprised by inflation as you are. They do not want deflaton because capitalism does not work with deflation (deflation = depression) but they have no idea how to control inflation. Why do people buy houses that they do not need? Because they think that the value will go up? Why do they think that? Becasue everyone thinks that, so prices do go up so we have inflation – nothing to do with the fed.rather becasue because people want something for nothing. Becasue “markets” because capitalism.

        • Wolf Richter says:

          topcat,

          Nah, there is no mystery. We know that low long-term rates are the result of QE. That’s why central banks use QE. We know that high short-term and long-term interest rates will tamp down on inflation by tamping down on demand for assets and consumer goods. House prices are going to come down with 6% or 7% mortgage rates. We know that. Consumer prices will stabilize (not come down, but rise more slowly). Pushing up short-term and long-term interest rates has been proven to work to fight inflation.

          The Fed knows exactly what to do to tamp down on inflation: raise its short-term policy rates and start unloading the balance sheet, which will push up long-term rates.

          The Fed has a huge balance sheet, unlike in the 1970s, and it can unload a huge amount. It can drive the 10-year yield to 8%, no problem. This will end inflation. Everyone knows this. It will also produce a major – and I mean MAJOR – downturn in asset prices. And that’s why those that hold assets don’t want the Fed to crack down on inflation. Simple as that.

        • RightNYer says:

          Topcat, if the Fed truly is “surprised” by inflation, they’re patently stupid. That would be like driving a Chevrolet Suburban at 100 mph on the Pacific Coast Highway and then being “surprised” that you went off the cliff.

        • DR DOOM says:

          I think it is Fed Speak via Congress which is lapped up by those who are spoon fed it through the MSM/Cable outlets. Scary thing is that a surprising popular belief is that it is a good thing Treasury and the Fed are “working together”. Good grief.

        • Swamp Creature says:

          Agree with Wolf’s analysis except you won’t need 6 or 7% interest rates to bring down housing prices. I think we’re seeing softening already with the small increase in the 10 year Treasury Rate to 1.62%. All the mom & pop investors are the 1st to get cold feet. They are owning two or more homes and can’t afford that. You’ll see prices stabilize as they are doing here in the Swamp. The next big move is down.

      • LK says:

        Alright, then what does hyperinflation signal? I’ll agree with you if you say the economy is *changing*….

      • Sams says:

        Inflation used to be defined as monetary inflation. That is an increase in the amount of money. In the time of hard currencies that was could be done a few ways. Gold and silver coins could be made lighter and smaller with the same value stamped on. The composition of silver coins could be altered with addition of other materials to get more “silver” to mint coins from.

        Note that rise and fall of prices and wages had nothing to do with inflation measurement! Inflation was strictly measured on the amount of money.

        That “economic growth” is in a finite world nonsense from someone that never understood exponential functions in the math class. Technology, society and the habitat may change, but “growth” over time is not possible. On the other side masquerading transfer of wealth as “economic growth” may be a way to hide reality.

      • historicus says:

        Kaleberg..
        “. Too many very rich people benefit from the status quo and are terrified that any change is more likely to harm them than help them.:”

        Who owns stocks and real estate, the largest beneficiaries of inflation?
        The Rich, the elites.
        Who is really harmed by inflation? The working families of this nation.

    • HollywoodDog says:

      Deflation is pretty devastating—for almost everyone involved. So we aim for 2% inflation to keep things purring along. And an inflation rate significantly above 2% is probably the only thing that will convince the Fed to raise their interest rates.

      • SpencerG says:

        Exactly.

      • historicus says:

        Hollywood…
        It is the arrangement of promoting inflation while keeping rates well below inflation. That is arranged theft.

        For 7 decades, Fed Funds tracked or exceeded inflation. This was to ensure holding dollars was not a punishing condition. Now, it is a promoted condition by a Fed that shirks their duties, and intentionally assists one group at the expense of another. Hayek warned of this…the game of central planners. He also warned of some people having privileged information…….note the Fed Governors and their insider trading, and likely “advising” certain trading entities.

      • Bobber says:

        “Deflation is pretty devastating—for almost everyone involved.”

        Absolutely not. Let’s not parrot the musings of spineless individuals.

        Deflation is wonderful for younger generations and workers. With deflation, they could actually buy housing and investments at reasonable prices.

        Inflation is simply a wealth transfer from workers and young generations to old generations. There is nothing good or justifiable about it. It’s a tool by politicians who can’t stick to a budget and believe money falls from trees. It allows them to deceive the public, which can’t tell the difference between real economic growth and simple price inflation.

        If your house doubles in price, do you think you are wealthier? The house is the same before and after, so there was no gain in real wealth. The price rise is entirely attributable to home price inflation, not economic growth.

        • eg says:

          This is a historically unserious statement. The effects of deflation are terrible, as any generation that endured it well knew.

        • Wolf Richter says:

          eg,

          To use your elegant phrase: This is a historically unserious statement: “The effects of deflation are terrible, as any generation that endured it well knew.”

          No they’re not. 1% deflation is no more terrible than 1% inflation.

          Yes 25% deflation is just as terrible as 25% inflation. It’s symmetrical, but the winners and losers are the opposite.

    • Dj says:

      A wholly fiat debt based system needs inflation to operate properly. Money is borrowed into existence from nowhere, interest gets paid to the loanee, more debt creation is needed to pay this interest. Rinse and repeat.

    • RH says:

      I agree. What most people forget is that the banksters supposedly hold your money in their banks and other financial institutions and are happy to see inflation eating it away.

      Think about it: the deposits of Americans in banks, for example, are LIABILITIES that the banksters owe to Americans. If they can create significant inflation, e.g., 10% real inflation per year, then what they owe you per year decreases at $10 per year: so at the end of a year of their “Federal” Reserve’s coincidentally created inflation, your purchasing power is reduced to $90.

      Meanwhile, in that same year, banksters can charge Americans interest rates of 12% to 27% on credit cards, credit lines, cash advances, etc., etc. They even charge such sums on the secret funds that they obtain from the “Federal” Reserve (basically by just creating digitally the funds that they lend to you) for which they pay their privately owned but misleadingly named “Federal” Reserve 2.5% or less per year. Hence, their profits are and will remain GINORMOUS.

      The trick is that they combined with crooked politicians of both parties. The ultra rich do not want to pay taxes, so they love that the creation of money by the Wall Streeters’ and banksters’ “Federal” Reserve is constantly creating inflation, which now has been hidden because they changed the CPI measurement methods repeatedly to hide the true rate of inflation faced by most Americans.

      They hold assets that are inflation proof and can pass along any price increases due to inflation to ordinary Americans. Indeed, the ultra rich also profit from inflation, because the sums that they owe ordinary Americans on bonds, etc., are also decreased by inflation, like the banksters’ liabilities. Thus, the people that control the country, meaning the banksters, Wall Streeters, ultra rich, and their puppet, owned politicians, love and benefit from hidden, increasing inflation.

      However, like a tiger held by the tail, inflation may be getting out of their control. Once inflation expectations rise and rise, hyperinflation may prompt Americans to finally open their eyes and demand change.

    • RH says:

      On final thing, the banksters, Wall Streeters, ultra-rich, and their puppet, owned politicians are using inflation INSTEAD of taxation. In other words, they do not want to actually force the ultra rich (who include the banksters and Wall Streeters, actually) to pay a fair share of their income in taxes. That would require eliminating loop holes like the GIGANTIC loophole for foreign earned income not brought back to the US through which Gizmodo reports “Apple Successfully Avoids $50 Billion in American Taxes.”

      They can also prevent their companies from paying out dividends (and the maximum, just agreed, international tax rate on corporations if it is even enacted is a measly 15% on net income after HUGE DEDUCTIONS for corporate jets, corporate vehicles, secretary-prostitutes, expense allowances, corporate condos, etc., etc. Hence, now, if you want to collect the TRILLIONS in unpaid, avoided taxes that the ultra rich have evaded paying for many, many DECADES, the only mechanism left is to raise the estate, gift, and generation skipping taxes.

      The current, proposed increases on the marginal tax rates are just too easy to avoid. I will not even speak about the persistent, massive, tax evasion (not just avoidance) among the ultra rich as discussed in cbs’s “Richest Americans fail to pay $163 billion in taxes, Treasury estimates.”

  2. Truckman says:

    Firstly, having lived in Yorkshire for many years, I can assure you that the Yorkshire Post is not just some hick regional newspaper. They have a pretty good handle on what’s going on, and have on several occasions over the years got some good scoops about honest admissions from people in power that the national press miss. Furthermore, Yorkshire folk are plain-speaking. They aren’t interested in pontificating drivel. Say what you mean. Folks in Wyoming, in my experience, are similar.
    Secondly, carefully collect Bailey’s phrases together. The BoE have been surprised, they don’t know what’s going on, they are projecting solely off macro data without any idea if it’s still relevent, and they promised they will fix it without any justification that they either know what the right thing to do is or have the capability to do it.
    In short, they’ll adjust interest rates and pray.

    • Rosebud says:

      Good catch, I saw that too. John G Bolton was from Yorkshire, but made a name for himself in the USA and esp. Australia. He was a radio astronomer who hitchhiked across the Universe. He came back to visit us recently and paid a visit during the Canadian election.

    • Chrislongs says:

      Wolf,
      QE ongoing in UK the BOE is just jawboning & will first express surprise then say it was unforeseen & finally say it is too late to rectify . Rinse & repeat while their inflation linked pensions keep rising!

  3. Marco says:

    I heard on the QTR Podcast the best fix for Inflation. Force Fed Governors to place all their Investments when they join the Fed Board in an ‘Inflation plus 0.5 per annum’ payment fund. That will soon stop hidden Inflation in one go. Great idea.

    • Truckman says:

      Won’t last 5 minutes. Discreet stock profits are just one of the current mechanisms for bribing Fed Governors. They’ll just sell all their stocks and rely on lecture tours, book deals, non-executive board salaries. Heck, maybe they’ll all become great artists, just like Hunter Biden, and sell paintings at 75k a pop.

  4. Wait until they find out that raising interest rates makes the cost of money more expensive, and they are adding to inflation.

    • Truckman says:

      Kicking the can down the road is done by people who daren’t look forward. Kicked cans may therefore end up going through shop windows.

    • BankSerf says:

      I think this is unexplored generally, that higher rates can perversely contribute to higher inflation and thats why the trends lasts so long (e.g. for rates lowering).
      Increasing rates makes goods cheaper which increases demand.
      That aside something that has been left out of inflation measurements is the price of saving, which has been historically expensive. As real rates go up saving becomes cheaper.
      We will see !

      • The Real Tony says:

        Paul Volcker killed inflation with high interest rates.

        • Kaleberg says:

          He also killed economic growth. The economy has yet to recover. His goal was to cut wages, and he succeeded. Productivity has soared, but an hour of work gets you less and less of the GDP each year. No wonder people are pissed in different flavors.

        • historicus says:

          Kaleberg
          What Volcker did, was flush the excesses.
          The 1980s from 1982 on benefited greatly from what Volcker did.
          All the way through to about 2007.

          This new breed of central banker does not allow corrections. And why are they called “corrections”? Because they correct. They flush excesses and expose the poorly financed. What is left is a healthier market and economy. The current central bankers disallow corrections thus allowing excesses to accumulate. When the eventual flush does come, its is systemic threatening in nature. And then…..enter the central banker to accrue more power and self author new directives. (climate change, etc.)

        • Nick Kelly says:

          Volcker also had a MAJOR dollar crisis to contend with, the first since US$ was mandated as world currency at Bretton Woods. There has never been another as bad.
          It would probably take a dollar crisis to focus this Fed. In the late 70’s the US had to issue bonds denominated in Swiss francs.

          A dollar crisis may be building. Inflation is just another way of saying ‘weak currency’.
          Beef up 10%= dollar down 10%.

          A few weeks ago oil hit 74 or double 2020’s average of 37. Now WTI has hit 80. The acid test of the US$ is not how many euros it will buy, it is how much oil it will buy. Oil is also an input to everything, from stuff made of it like plastics, to ag products that use machines, even something with no previous connection that is delivered by a truck. Related product nat gas also up dramatically.

          Moving on: I see a bunch of comments depreciating the remarks of the BOE. To me they seemed much more honest and to the point than the Fed’s warbles, that may be written by a computer using phrases grabbed from early Greenspanish.

          It also looks likely the BOE will raise rates this year. Will the Fed, or will they begin thinking about thinking about possibly examining the need to tighten in 23?

          Next point: we keep hearing the Fed criticized as ‘unelected’;
          I suggest anyone thinking the way to improve the Fed is to politicize it, is to take a look at the vicious tongue- lashing Powell took from Trump for not stimulating MORE.
          Trump also constantly mulled, aloud, firing Powell, no doubt by tweet.

          There is reason the Fed chair is a 7 year appointment which can’t be ended by the Pres. The intention is to insulate him from politics and so hopefully he can ‘call them the way he sees them.’
          To put the Fed under the Pres after those bizarre 4 years is to ask for punishment.

          Final: the NZ gov specifically told its CB to stop stimulus of housing. Guess being # 1 in a tough field became embarrassing.

    • Yort says:

      I would guess the govt will attempt to hand out more free money as a solution to higher inflation, which I would equate to pumping hydrogen gas into a dumper fire. At some point between now and mid-term, when inflation is proven to not be so called “transitory”, team Blue is going to freak out and hand out more free money as history has shown that the one thing that gets politicians thrown out of office is high inflation…

      This might be what the Fed wants to happen as it would place the inflation blame on govt versus the Fed elites. If team red plays the inflation card as they seem to be doing, the Fed might just be able to save their own arse and have the nation of economically illiterate voters blame team blue instead of the primary destroyer of the economy for the bottom 90%…Duh Fed…

      This could be a mid-term elections for the record books…Fed vs Team Blue. The balance of power is on the line next November, so place your bets accordingly…

      • Old school says:

        They are already proposing gifting $25,000 to certain first time homebuyers because housing is too expensive. Congress is enemy of middle class.

        • RightNYer says:

          Yeah, which means that the sellers raise their prices by $25,000.

          These people are idiots.

    • Banno says:

      Already happened since January 2021. 10 yr yield on Uk Gilt was 0.2% last week it was 1.08%. They can control short term rates but not long term, the markets dictate that. We are witnessing a collapse in confidence in governments across the globe. Sovereign debt crisis is going to gather pace going into 2022. Inflation is here to stay caused by shutdown of the global supply chain.

      • CJH says:

        Central banks control interest rates. Period. if the so-called ‘debt vigilantes’ go on strike, fine, the CB buys up the debt and it never gets into the secondary market. Bond buyers are supplicants. My view is that federal debt is unnecessary, anyway.

        • Augustus Frost says:

          Interesting how your claim only supposedly applies to developed country central banks. That should tell you something.

  5. J-Pow!!! says:

    Like I said, my inflation will cause a lot of transients!!!!! Hahahahahahahahahaha!!!!!!!!

    • Yort says:

      Got that right Jay, good job boy (now roll over)…HA I see lots of transients looking for a job that pays enough to survive, transients losing their homes, transients looking for help to feed their kids…hugs and kisses from the top 1% Jay!!!

      You know I sense the next Time Magazine “Hero” cover with J-Pow sporting that smug Game-Of-Thrones style grin with the caption…”Destroyer of Transients, Maker of Wealthy”…

      Plus Jay, maybe a noble peace price for solving hunger…(does it count if 20% of people starve to death globally???)

      • RightNYer says:

        The part that really fascinates me is that so many people pour accolades on Powell for “saving the economy with decisive measures.” He did neither. He took the easy way out. He did the equivalent of giving in to your children so that they stop whining. It works in the short term, but in the long term, you’ve caused far more damage.

        Any central banker can print money. It requires neither intelligence nor creativity.

  6. ru82 says:

    Oil is up tonight over 80.

    WSJ had an article about companies having a hard time finding employees even after increasing wages a lot and signing bonuses.

    Interest dynamics

    • ru82 says:

      Just thinking out loud. So you have increases in wages but dwindling products because of supply chain disruptions.

      Certainly points to higher inflation rates.

    • ivanislav says:

      And Brent is over 83. I am expecting more volatility in energy markets. US oil production is down about 1.7 million barrels per day from the pre-covid peak of 13 million (Duck-Duck-Go “EIA Weekly U.S. Field Production of Crude Oil”). Any substantial recovery in demand should cause massive shortages if it’s not met with a commensurate increase in fracking, which you can track in near-realtime.

      And somewhat related – every 5-10 years Henry-Hub natgas spikes above $10/million BTU and we’re only 1/2 way there. Still room to run IMO.

    • SpencerG says:

      It is really amazing to me that the price of oil is now higher than at any point since 2014… the high during that time was October of 2018 ($77)… but the Frackers have not turned on the spigot. EIA is reporting that U.S. oil production is sitting at about 350 million barrels a month… and has barely budged since the summer of 2018.

      You really have to hand it to the Saudis… the two price plunges they caused this decade have spooked the American oil producers into freezing production. Obviously the Frackers profit from the higher prices… but they would profit more from a combination of higher prices AND increased production.

      But… as Wolf has said… the Frackers (and their investors) would be taking a risk if they got out over their skis. The Saudis… or the Russians… or OPEC could end the good times pretty quickly. Perhaps for now it is better for the Frackers to keep it simple by making profits, paying down debt, and proving to Wall Street that fracking makes money rather than just burns it.

      • ru82 says:

        They more than spooked. I have the skeletons of a couple of oil companies that went bankrupt during that time. They are more than spooked they no longer exist. LOL

  7. The Real Tony says:

    The Bank of Canada has fallen asleep as the Chinese drive the average 1,200 square foot 50 year old resale bungalow toward the 2 million dollar mark on average in the 4 Chinese cities. Markham, Richmond Hill, Unionville and Stouffville. This is the end of Trudeau’s immigration policy as immigrants coming to southern Ontario, Canada have been completely priced out of the residential rental market.

    • historicus says:

      Not to mention Vancouver.
      Foreigners bidding up the real estate to a point the citizens cant afford housing.
      And they still say trade deficits dont matter, because the currency must return to the deficit country. They miss the fact that ownership and control often changes with that return.

      • RightNYer says:

        Yes. People continually say “Who cares if we make anything? As long as people around the world are willing to give us their stuff for our printed dollars, it’s like manna from heaven!” They neglect to mention that every dollar we send out is a future claim on our assets, and we can’t control when that happens.

        • Augustus Frost says:

          Must be the same people who believe large scale hot wars have been outlawed too. Try fighting a major war with a de-industrialized economy.

          Good luck with that.

        • 91B20 1stCav (AUS) says:

          Augustus-a core, tragic aspect of every human empire as they look more and more inward, convinced their past successes guarantee future results…

          may we all find a better day.

  8. Raymond Rogers says:

    No meaningful tightening moves will be made by the major central banks, not until budget entitlements are watered down to next to nothing. Sure the printers may be slowed down a bit, but the debt burden cant handle real rate hikes. The dollar will rise in the short and medium term due to debts owed cancelling out the supply of those dollars.

    At some point the only way the can is able to be kicked down the road a few more yards is for the treasury to mint large denomination coins or bills, as they dont have the same counterparty obligations as bonds. It may be sold in a more palatable form of ten (or more) 100 billion dollar coins.

  9. Djreef says:

    OK, so the FED was wrong, or just stupid?

    Incompetent either way.

    • ru82 says:

      Remember…the FED never wants deflation. They will take high inflation rates of deflation or now growth any day of the week.

      There is too much debt in the world at risk of a default if we ever have any type of deflation.

      The financial system is set up for risk takers and TBTF these days.

    • historicus says:

      You forgot dishonest.
      They intentionally shirk their duties, ignoring the mandates/agreements/instructions that allow their existence.
      They promote inflation in violation of the Second mandate..
      They promote immoderately low (record low) long rates in violation of their Third mandate.
      That is not making a mistake or being stupid. That is intentional.

    • SpencerG says:

      The Fed is not necessarily wrong OR stupid. Right now they are held captive by what is happening on Capitol Hill. Until they have some clue how much stimulus is going to come from Congress in the Reconciliation Bill it is hard to make a judgement as to how much they should be tightening. There is a world of difference between $350 billion a year or $150 billion a year in stimulus… to say nothing of $75 billion a year if it is half paid for.

      There may come a point where the Fed has to shoot in the dark… but for now they have just been playing for time in the hopes that all would be clear before the 2021 Fiscal Year began.

  10. John Knox says:

    The Fed is a political animal. It’s going to have a very hard time raising rates due to what it will do to the economy.

    • historicus says:

      John Knox

      Political to the point of serving the largest debtor in the world that just so happens to empower them.
      Political to the point of serving those fully invested in real estate and stocks….not so serving to the working, earning and saving People of the nation. Never has saving been so punished by deliberate policy. (5% a year currently)

  11. Beardawg says:

    So the BOE is going to start raising rates BEFORE tapering asset purchases? Isn’t that atypical ??

  12. George Wood says:

    QE drives demand not the supply side inflation we are currently seeing.

    I still cannot find a satisfactory explanation for the supply chain disruptions.

    What is causing the bottleneck in shipping, why can’t supply recover.
    Currency devaluation is ongoing, widespread and gradual, I doubt it is that simple.

    China and its many economic issues are likely causing most of the problems.

    Why is China suddenly so interested in Taiwan? The US has restricted China’s access to technology, specifically semi-conductors. Solution, Taiwan, the semi-conductor power house of the world and China’s
    new silicone valley.

    Current inflation is supply side driven. Reducing QE and demand will not stimulate supply.

    • LK says:

      Wolf has only given a half-dozen explanations and factors for supply chain issues.

      China being our largest trading partner and the source for most of our goods as well as being where COVID-19 originated is, at best, a historical coincidence without far more concrete evidence accompanied by far less conspiracy and paranoia.

      If you want a convoluted, malicious, and irrational scheme to massacre the world population straight out of a spy thriller, No Time to Die is now in theaters.

      • Nick Kelly says:

        China isn’t suddenly interested in Taiwan. They’ve been obsessed by it since the Nationalists fled there in the late 40’s after losing the civil war.
        People can debate what will happen if they attempt to invade. I think the Mainland’s force will be thrashed. Thinking the US would stay out is a fantasy. One thing I never hear mentioned is the Japanese Navy a very large and capable outfit and part of the US, Brit, Oz alliance.

    • historicus says:

      George…
      Ponder on this….
      We are told the bottlenecks are creating the inflation. Perhaps it is just the other way around.
      I suspect every purchasing manager in the world is calling their suppliers…
      and saying “I’ll take all you got at that price.” …knowing inventory is better than cash in an inflation.
      Thus the log jam caused by the realization of INFLATION. Suppliers become sold out….and forward sold out also.

      • RightNYer says:

        Yes. While inflation is always a monetary phenomenon, people’s reaction to it is psychological. And once people start to believe that inflation is going to get out of control, they start to hoard, and it becomes a self-fulfilling prophecy.

        I’m seeing that right now. People saying things like “Yeah, I know I’m overpaying for this car or house, but it’ll just be worse next year with the way things are going.”

        Our “leaders” need to get this under control or we’re going to have a massive crack-up boom.

      • Bricks says:

        There is a lot of this going on, from small companies to large. It is the toilet paper psychology , gotta load up the inventory because it won’t be available when you need it.

    • Paulo says:

      George,

      “I still cannot find a satisfactory explanation for the supply chain disruptions.”

      I don’t think it is just the money and financing issues.

      The ships are huge, the containers are big, the trucks and trains flexible distribution tools, but for decades the build up was measured and responsive to normal consumption rates (behaviour) with the end result of a very very complex Swiss watch system of supply meeting demand on a global scale.

      Toss in one pandemic. The consumers are acting differently. Ports are sometimes shuttered, factories idled. Online with consumers buying more. I would think it could take a good five years after pandemic to recover to a new normal.

      Visible analogy. I once worked in a very big west coast sawmill, right after high school. Sometimes at the beginning of day shift I would take up my position and see the entire mill backed up. The green chain would have lumber stacked up 5′ high and be impossible to clear. The conveyors would be plugged and the giant bandsaws would keep pumping out the wood until even the logs could no longer be worked. Everything would grind to a halt. People would yell, “Graveyard Fu**ed us again”. Foremen would yell, management visited, people were sullen. Everything ground to a crawl as our shift tried to get back on track. It would take hours to cycle into normal operation and production was nil for the duration. All this from the previous shift dogging it for just 1-2 hours at 4:00am. This is a pandemic. Ships are idled up to 30 days and more just keep coming. Vancouver container ships are anchored up in the gulf islands, waiting their turn just to move over to a harbour waiting position. Meanwhile, the grain ships are arriving. I would think it could take years to get back to normal operations. Years.

    • Old school says:

      My friend got a call from a builder wanting to know if she still is thinking about selling her house. He had gotten a call from someone wanting him to build them a house. He told them he couldn’t give any price or date commitments and so he called my friend to see if she wanted to sell. He had built her house.

      When builders are turning customers away something is wrong.

      • historicus says:

        The Fed has locked up the housing market in more ways than one.
        Contractors cant bid for they cannot lock in materials and labor costs.

        Now, why is that? Inflation. Fed pressing mortgage rates below inflation so everybody getting as much of that money as they can. Owners of homes must hold on to their largest hard asset in an inflation. Locked up.
        The ramifications of the bad Fed policy is coming home…in so many ways

    • Nick Kelly says:

      China isn’t suddenly interested in Taiwan. They’ve been obsessed by it since the Nationalists fled there in the late 40’s after losing the civil war.
      People can debate what will happen if they attempt to invade. I think the Mainland’s force will be thrashed. Thinking the US would stay out is a fantasy. One thing I never hear mentioned is the Japanese Navy a very large and capable outfit and part of the US, Brit, Oz alliance.

    • Auldyin says:

      @GW
      “Why is China suddenly so interested in Taiwan?”
      They’re not.
      It’s your MSM at the behest of NATO that is.
      To take your eye off all the disasters at home.

    • Auldyin says:

      @GW
      “Current inflation is supply side driven. Reducing QE and demand will not stimulate supply.”
      I partially agree but it is money demand from 12 months ago that is hitting the current supply shortage and sending prices haywire.
      The Fed has already negated a large part of money demand in one year’s time by running up a huge pile of reverse repos which is also offsetting ongoing, but soon to be tapered, QE. If supply comes back on line in a year to 18 months (unlikely IMO) it may be met with curtailed monetary demand which could lead to price roll back unless wages take off.

  13. Thomas Wolfe says:

    The rally that follows central banks’ inability to tighten into rising inflation will be a nice one, but the eventual vertical rally following aggressive rate hikes rate due to high double digit CPI (and them folding soon after) will be a sight to behold. It’s there that the scramble for All assets without regard for price begins.

    • historicus says:

      The central bankers CAN tighten…….Fed Funds in record levels below inflation.
      And they can take that QE money and use if for interest payments….which, BTW, would go into the economy. The difference is the government wouldnt control that QE money injection….that money would be redirected to the lender and he would get to spend that money. And it would probably end up in consumption and economic activity. Is that a bad thing?
      Maybe low interest rates ARE THE PROBLEM.

  14. Yort says:

    Hmmm…anyone ponder what could happen to the stock markets when the ECB and US Fed tighten at the same time?(note in past one bank tightens as the other bank increases liquidity)

    Per WSJ (note the “two banks” are the ECB and US Fed in article):

    This time, however, the two banks are set to taper in tandem, amplifying the effect on money flow. This should terrify investors. Recent pioneering research by Xavier Gabaix and Ralph Koijen shows that flows not only move asset prices; they move them disproportionately. A dollar added to the stock market can increase aggregate market valuation by as much as $5. A dollar subtracted can have the opposite effect, decreasing aggregate valuation by $5.

    No flows are more sizeable or more predictable than a big central bank’s purchase schedule. As the world’s two major central banks prepare to turn off the taps, financial markets are on notice. Frontier assets such as NFTs will likely be the first to fall—but experience suggests that no asset class is safe from a liquidity drought. As the taper tandem unfolds, investors and asset managers will need all the downside protection they can get.

    • Yort says:

      In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis

      Per abstract ===>Using the recent method of granular instrumental variables, we find that investing $1 in the stock market increases the market’s aggregate value by about $5.

      Research paper link below:

      https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3686935

    • LK says:

      “Frontier assets.”

      God, this crash can’t come soon enough.

    • historicus says:

      Yort
      “what could happen to the stock markets when the ECB and US Fed tighten at the same time?”
      Well they have to work in tandem or else the arbitrage forces negate the one vs the other.
      This is part of what happened in 2018…when Powell, to his credit, attempted to get rates up to the inflation rate. However, the ECB did not move in tandem, and the arbitrage kicked in….borrowing in Europe and lending in the US.
      But what of this scenario…
      The Fed raises rates slowly, with little impact on inflation…thus holding cash is still penalized…
      But, the rate hikes are enough to roll the stock market and real estate market over….
      No place to hide….wealth destruction. And perhaps the wealth creation is what was fake all along…

  15. Ian says:

    Rate rises? I will believe when I see it. The Guv said the other day he sees inflation at 4% by year end, his rates are stuck at 0.1% and then comes out his meeting with rates unchanged. That’s 4% negative real rates with inflation rampant and he jawbones. They will not destroy the inflation they have coveted so long.

    • historicus says:

      Ian
      Dont expect the arsonist to reach for the fire hose.

      But why is it acceptable now to have such a historically out of whack relationship between fed fuds and inflation? Plenty are being hurt bad by this…and one can only deduce that it is INTENTIONAL.
      When will the Fed be held up as SHIRKING their duties, mandates?

  16. “We printed a load of money to make the UK public stay at home and destroy their small businesses, held up supply chains and over paid for solar & wind farm subsidies. Now you have to pay. And you’ll be happy”

  17. Bet says:

    The markets re run by psychology too. If stock holders no longer believe their holdings keep going to the moon…..
    What goes up hard and fast. Comes down harder and faster

    • RightNYer says:

      Exactly. People like to repeat the adage “No one will sell stocks as long as cash yields nothing” which is true to an extent. But ultimately, when a crash starts, people go into panic mode and are concerned with minimizing their losses. The alternatives don’t even come into play at that point.

      • historicus says:

        RightNYer

        Like the person who buys the stock that has the 3% dividend…then one day the stock is down 5%. What happened? Call the broker…

  18. CJH says:

    Congress can create full employment by becoming the employer of last resort, who just happens to offer a socially responsible wage with benefits. Then you tax wealth to bring down income inequities. Buying and selling financial paper and property speculation will become passe. Retained earnings and true investment will return and fictitious capital will disappear. No more idiotic, BS jobs!

    • LK says:

      Tell that to the TikTok day traders disrupting markets for the lulz.

      Best laid plans, etc. etc.

  19. 2BFrank says:

    Stocks perform very oddly in extremes, look at Venezuela and Zimbabwe, both had soaring stock markets, there were very few alternatives for the middle class, land if they could afford it, or gold the same.
    However the real cause of all of these problems is humans are utterly incapable of learning from history, every 80 years or so whatever collection of physcos are in charge repeat the same old mistakes and always will, personally I am beginning to think maybe we try an AI as central banker, can it be worse?.

    • Wolf Richter says:

      2BFrank,

      “…look at Venezuela and Zimbabwe, both had soaring stock markets”

      BS. Those stock markets are denominated in local currency, and the local currency went into hyperinflation, so every worthless thing, from toilet paper to stocks suddenly had a huge number in local currency attached to it. Why does this nonsense about the Venezuelan stock market keep getting posted here?

      • RightNYer says:

        I don’t think you’re actually disagreeing. I don’t read his post as implying that the stock market “soared” in terms of actual value, just that it soared in nominal terms, which is true.

        During a crack up boom, EVERYTHING goes up in nominal value. Which is the best to hold during that depends on a number of factors.

  20. BuySome says:

    “…higher, I am afraid.” “…I would prefer it not be there.” How typically calm and understated is the language of the British elites class. Let me export an Americanism that they might try using to show they have some concept of what the “average Terrance & Judith” commoners are facing…”Holy shit folks, have we got a serious malfunction!”

    • Nick Kelly says:

      How do his words compare to the Fed’s Greenspanish?

      Re: elites. The role of money in politics plays nowhere near the role it does in the US. Nor is the UK still mainly ruled by an entrenched Upper House, as it was when the US set up its system in around 1800, and it retains today. The UK also evolved beyond having a single (mono) person being a co-equal branch of govt.

      In the 1920’s the UK formed its first Labor govt, largely a union govt.
      Several members lacked formal clothing for their investiture. There has never been a US Senate with as many members of humble birth.

      The UK needs to import US governance like it needs another plague.

      • c_heale says:

        I think this view of UK politics is outdated. Politics in the UK is increasingly driven by money and the class system is back in force.

        • Nick Kelly says:

          Look up spending on US Senate races and see how it compares to total UK spending.

          Also note how incredibly over politized the US is: imagine House elections every 2 years! Then Senate and Pres votes. Then the whole weird thing happens at state level: House, Senate, and Governor. Governor? Can’t the guys they elected govern? And if this guv is supposed to exercise oversight or something, shouldn’t he be independent?

          A politically inclined American votes about 4 times as much as a Brit or Canadian and this is BEFORE voting for judges (!) etc.
          and every race has enormous budgets compared to UK.

    • Nick Kelly says:

      Trivia re: Greenspanish. When he started to propose to his intended bride she had no idea what he was talking about. It’s fun to imagine it:

      “When in the fullness of time and planets align, there may be a high tide, which if taken the flood… “

  21. Nigel says:

    Look at UK’s interest rates, bond yields. They are a joke, 1 yr.0.43%, 2yr.0.58%, 3yr. 0.68%, 5yr.0.80%, 7 yr.0.89%, 10 yr.1.19%, 15yr. 1.40%, 20yr. 1.51%, 25yr. 1.55%, 30 yr. 1.52%, 40 yr.1.41%.

    See how low these suckers are, they should all be with at least 3% to 3.25% up to 10 years, 3.55% to 4% from 15 to 25 years, 4.25% for 30 years. Then maybe we are something close to some reasonable inflation of 2.5% of over the longer term.

    However, since they have been underpaying real, inflation adjusted interest rates, yields for many years, they should all be in the minimum 1 year 4.25% to 30 year 6% range going forward to reflect inflation, money printing for many years and now too. They have a long way to go to be serious about normal to inflation adjusted interest rates, bond yields. Anything else is a joke and insult to us that have some intelligence.

  22. Auldyin says:

    These people are utterly without shame or irony.
    Andy Haldane (previous chief economist) said exactly everything Bailey just said at least two months ago and he was roundly attacked and denigrated for his position.
    If he had been listened to we could have been 2 months earlier into a solution but no such luck.
    Tragedy is, I said Haldane should have had Bailey’s job, but our political clowns are no better than yours at seeing what’s in front of their faces.

  23. 2BFrank says:

    Wolf, as you say the stock markets in Venezuela and Zimbabwe did soar in their local currency, I never stated otherwise, in which case surely the same will apply in the USA if the appropriate conditions apply, and the US dollar is well on the way to being worthless, it has lost 89% of its purchasing power since the FED was created in 1913, does that not remind anyone of Zimbabwe, albeit over a longer time span.
    People are the same the world over, the phycos in charge repeat the same mistakes over and over again, Marco Polo reported on paper money and inflation in China several centuries ago, the Romans clipped and diluted the precious metal in their coins, nothing will ever prevent the same old same old until humans cease to exist, or have their brains rewired.

    • Nick Kelly says:

      For a century before and during the Industrial Revolution in the UK there was less than 1% inflation per ten years.
      Coin op machines up to the 1950’s in the US had the price cast into the metal.
      A bottle of coke was 10 cents for 50 years. ( I remember the first time a coke machine needed more than one coin, 1974)

      There does not have to be inflation.

      BTW: Yes MP reported on paper money in China but on inflation?

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