Fed poised for another big policy mistake?

Credit Bubble Bulletin/Doug Noland/6-2-2023

Selected quotes from Friday’s report:

“It’s not a close call. If the Fed “Skips” policy tightening at the June 14th FOMC meeting, it will be yet another big policy mistake. The long string of errors has greatly damaged the Federal Reserve’s inflation-fighting credibility. It has also promoted dangerously dysfunctional market structure. At this point, the Fed should err on the side of demonstrating resolve in reining in inflationary excesses.”

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“Financial markets are also poised to sustain inflationary pressures. Resurgent Bubble Dynamics have fueled a major loosening of financial conditions. Surveys and anecdotes point to a degree of bank lending tightening. But this has been more than offset by risk embracement, leveraged speculation, and liquidity excess throughout the financial markets.”

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“Basically, the Fed/GSE liquidity backstop was integral to the pricing and liquidity dynamics that made derivatives so appealing for both hedging and speculating. And the bigger this complex became – and the more critical to the markets and economy – the more the Fed was compelled to quickly intervene to stabilize markets. Last year’s heightened concerns that the unfolding tightening cycle created ambiguity with respect to the Fed’s liquidity backstop were allayed by the Bank of England’s September and the Federal Reserve’s March interventions.”

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