Paving the way

While the Fed is now defending against the White House for over spending on the renovation costs of its headquarters in Washington DC ($2.5Bn), as a potential “cause” to fire Jerome Powell, the ECB has been reducing its balance sheet by almost 50% since the peak of 2022, while lowering interest rates in an effort to normalize its finances and perhaps to prepare for the next crisis where it will have to print money. The Fed has also reduced its balance sheet, albeit not as aggressively as the ECB, but it hasn’t reduce rates, which is bringing tension not only with the president but in the real economy where the Real Estate sector is showing signs of stress. Powell is using a literal and focused interpretation of the Fed’s mandate where full employment and inflation is all that matters. The ECB may have taken a broader approach and it’s using different levers to manage unemployment and inflation, acknowledging that they’re doing so in a fragile environment, with long term yields going up and an anemic GDP growth. Both are confronting stagflation, and they may use their respective balance sheets, perhaps in a coordinated way, to get out of that hole, both are draining liquidity from the system, and at some point it may affect the overnight market, and the equity markets, which will trigger the next balance sheet expansion. Gold and Bitcoin are telling us what’s coming.

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