Inflation is Destroying the Fed’s Credibility

It will likely take a fairly big recession to bring inflation back to two percent, and probably a recession that lasts up to…

Alfonso Peccatiello on Palisades Gold Radio

Tom welcomes back Alfonso Peccatiello author of the Macro Compass Substack to the show.

Alfonso believes the Repo markets could be the most important part of the pyramid going forward. The system is continuing to add more layers and levels to the way markets work. Repo markets exist below bonds at the very base of the pyramid. Repo markets allow for leveraging of bonds and treasuries.

Repo markets are very active to the tune of trillions per day. Pension funds, asset managers, or corporate treasurers are on the other side of these trades. So long as financing costs are predictably low, there aren’t many problems. There is a lot of cash chasing a limited amount of collateral. When Repos become unsteady, it shakes the entire pyramid structure. These markets can become very tight rapidly.

The Fed has not changed its inflation targets. They want to be improving inflation expectations because it impacts their credibility. They are very committed to shrinking their balance sheets. The chances of a soft landing in this environment are quite low. It will likely take a fairly big recession to bring inflation back to two percent. Probably a recession that lasts up to two years. However, the system is much more leveraged and fragile than in the past. This makes addressing the problems much more complex.


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