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The answer to "What's going to give the Fear Index a boost ?" was staring us in the face all along .... The threat of Thermonuclear War,...

August 11, 2017

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When inflation might not be the be-all and end-all .....

April 12, 2018


ref :- "Fed Sees GDP Hit From Trade War Outweighing Fleeting Inflation" , Bloomberg Markets

Just time today to point you towards this piece on Bloomberg ..... The minutes of the March meeting of the Fed 's Open Market Committee (FOMC) were released last night, and we were waiting to see what they were making of the increasing possibility of trade conflict. In the event it was pretty plain that they were more worried about the effects that this issue would have on growth than they were about its inflationary ramifications, which they consider would be a short-term, transitory phenomenon as tariffs are imposed.

This is both logical and understandable, but interesting in that generally-speaking central bank policy seems to revolve around inflation targets more than any other consideration and you rarely get to hear officials sounding relaxed about unwelcome moves in the inflation rate very often. In fact in the case of the Fed, it has a dual mandate to control inflation at optimum levels and to promote employment. Theoretically , growth is not mentioned as part of the mandate although it is obviously implicit in generating employment to a large degree

Beyond the rarity value of suggestions that the Fed might overlook a short-term spike in inflation in favour of fostering continued growth, the practical implication that one might draw is that  --  if it all kicks off  --  falling asset prices would impinge on the spending power of consumers and confidence would be badly affected. In other words, financial conditions would tighten and reduce the necessity for the Fed to tighten rates at the pace that they currently plan to.

**** Note : Any measure of Financial Conditions takes into account how such things as asset prices (the stock market), currency movements, bond yields, volatility and money flows are affecting the economy  --  rather than just headline interest rates ****

As ever, there are a lot of ifs, buts and maybes attached to such a scenario playing out, but Matthew Boesler's article is well worth a read .... not least because the tightening of financial conditions is already underway.

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