To Hike or Not to Hike
“That is the question. Whether 'tis nobler in the mind to suffer the slings and arrows of outrageous fortune, or to take arms against a sea of troubles and by opposing, end them.”
Markets are forcing a choice. Hike rates to combat inflation and be credible or cut rates to save US debt servicing costs and risk further inflation. No action could be disastrous and erode confidence.
And so we come to Mr Warsh’s second FOMC meeting and having given him the luxury of putting up with bluster on his first, markets will be watching very carefully. Because action is needed.
Tech stocks are falling, Oracle down 65%, private credit, private equity and commercial real estate are bleeding but equity markets are near their highs and they must not be allowed to crash. Trump says so. Mid-terms are on the horizon.
The US has been drawn into a Vietnam-on-steroids situation in Iran. The US cannot win by bombing deserts, and meanwhile Iran has the petrodollar system in its grip. China is now hoovering up gold at record rates and a new monetary system is upon us. Well not us, not yet. It’s upon those outside of the western fiat monetary system.
Once legitimised by being backed by gold, the US debt explosion from the Vietnam war forced Nixon to take the USD off the Gold Standard. As Treasury Secretary Connally said at the time”: “the USD is our currency but it is your problem”. That certainly rang true, backed up by the US forcing Saudi Arabia to only sell oil in USD, the petrodollar system secured western economies for a further 50 years. Backed not by gold but by oil. Secured by energy.
We can’t help feeling that Mr Connally might well have to rephrase to “the USD is our currency but it is now our problem” soon. And the FED could well accelerate the inevitable this week.