The quandary central banks have been facing can be summarized as follows:
- stocks can’t move higher without the support of higher oil prices; and,
- oil prices can’t move higher without triggering inflation; and,
- central banks must tighten if inflation surpasses their target thresholds; and,
- the mere mention of tightening sends stock prices lower.
As CL neared critical support (after having reached our upside target last week) stocks were looking decidedly nervous. Clearly, something needed to give. Hence, Janet Yellen’s suggestion that inflation would be allowed to run a little hotter.
Yellen laid out the deepening concern at the Fed that U.S. economic potential is slipping [ed. note: this means lower stock prices] and aggressive steps may be needed to rebuild it.
Yellen, in a lunch address to a conference of policymakers and top academics in Boston, said the question was whether that damage can be undone “by temporarily running a ‘high-pressure economy,’ with robust aggregate demand and a tight labor market.”
In fact, the BoE’s Mark Carney said the same thing on the very same day. From the Telegraph:
Mr Carney told an audience in Nottingham that the current environment of low inflation was “going to change”, with the drop in the value of the pound likely to push up prices across the economy.
He said food prices were likely to be affected first, signaling that the situation was “going to get difficult” for those on the lowest incomes as the UK moves “from no inflation to some inflation”.
Fed followers will find this pivot familiar. Remember when reaching 5% unemployment was the bogie for discontinuing accommodative measures?
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