Fed, ECB take positions to face the next global financial crisis; the Brits uncovered

Last Thursday 2 October 2017, the US President Donald Trump announced the nomination of Jerome Powell (on the left) to be chairman of the Federal Reserve System. Despite the usual Trump verbalism, the truth is that his choice was more or less forced. (Official White House photo, with the relevant Trump statement on it).

The appointment of Jerome Powell as the next head of the US central bank, the famous Fed, is a reassurance to the financial world that the giant lenders will continue being favored by ample and very cheap money. Last Thursday, Donald Trump, the American President didn’t dare to change the cautious approach to monetary policy. He chose the only candidate who guaranteed a thorough continuation of the measures applied by Janet Yellen, the Fed boss for the last four years. Powell has worked closely and backed Yellen’s prudent choices. She is openly preparing for the next financial crisis.

Also, last week the Bank of England made sure the UK financial leviathans won’t be deprived of the almost free cash it has offered them. Last Friday Mark Carney, the Canadian Governor of the BoE just restored the central bank’s main interest rate to 0.5%, as it was before being cut down to 0.25% in August 2016 , some weeks after the Brexit vote of June 2016. Carney has one more reason than the Fed or the European Central Bank to raise interest rates. Inflation in the British economy moves faster than 2% a year, faster than the standard target level. That’s why he clearly said Britain should be expecting two more interest rates increases during the next two years.

Lagging Brits

However, if he was really anxious to bring inflation down to the appropriate level of below but close to 2%, he should have been much more hawkish with interest rates. The UK has inflationary problems, unlike the US and the Eurozone. On top of that, the dragging on and on uncertainty about the kind of Brexit the country is to finally decide, has left the London City’s banking giants bewildered. Under the circumstances, the last thing those money sharks could tolerate was a severe anti-inflation policy stance with a hawkish interest rate policy. At the end of the day, the announced BoE policy choices sent the foreign value of the pound sterling to its lowest level for the last six months. This is a proof the money markets considered the pronounced interest rates policy as inadequate to curtail rising consumer prices.

The kind of bank-loving Carneys, though, don’t care about inflation, at a time when the mega-lenders are having other pressing problems in London. The UK Brexiteer government doesn’t care at all if the City’s financial hub is having difficulties with the uncertainties around Brexit. More than half of the governing Conservative party PMs seem unimpressed by the City’s cries for a smooth and EU friendly exit. The City banking leviathans badly want to continue doing business all over Europe from their London hub. A disorderly Brexit will ruin this possibility.

City uncovered

The threats to transfer their activities from London to Frankfurt don’t terrorize anybody else but themselves, cost-wise, regulation-wise and tradition-wise. There is no better money washing machine in the world, than London. The opportunities the city offers to moneyed people are immense. It’s not the same in mainland Europe. In such an environment the Bank of England is doing its best to ‘comfort’ the London banking ‘community’. Who cares, if these extra dovish BoE interest rates policy may drive up the cost of living for the hard working Brits? The fall of the pound will certainly hike the prices of imported foodstuffs. This is true in relation to both dollar and euro priced goods.

Returning to Washington, where the Fed is based, the appointment of Powell is a kind of guarantee the euro/dollar parity will not drastically oscillate from its current levels, due to monetary policy reasons. This is so, because ECB’s main monetary policy instruments, being described in detail at the end of October – on the occasion of the relevant Mario Draghi Press Conference of the 26th of the month – will not change in the long run.

Stabilizing euro/dollar rate

So, the prospect for an unaffected from monetary reasons euro/dollar parity, must have being approved by Trump. Presumably the American President must have being briefed in detail about that, before deciding to choose Powell to continue Yellen’s choices.

In short, upholding the exchange rate between the two global moneys at its present levels must have been a possibly unspoken compromise, between the two sides of the Atlantic Ocean. Of course, this understanding is restricted to the effects stemming from monetary policy which the two sides have under their direct control. The rest cannot be controlled. However, in the middle of the Ocean, Britain and her pound sterling will continue on a difficult path, possibly downhill. The parities of the UK pound with the dollar and the euro will greatly vary according to the prospects of a soft or hard Brexit.

Brexit chaos

In this respect, the achievement of an agreement between EU and UK, about the two years interim period after March 2019 is of paramount importance. It will have a stabilization effect on the British currency. To be noted, during the interim period, practically nothing will change as far as the economic, trade and financial relations between mainland Europe and Britain are concerned. It will be exactly the same as today.

Two more years will also allow 10 Downing Street to negotiate the best possible future free trade agreement with the European Commission, somehow letting off the steam from the pressures of the hard-line Brexiteers. Under this light, it is not easy to predict the long term relation of the British pound with the euro and the dollar.

Preparing for the crisis

In any case, the basics for the future Atlantic economic and financial relations are practically there, and their prospects are only perplexed by the Brexit uncertainties. The ball is clearly in London’s court. The Brits must urgently solidify their position, because everybody else is preparing for the next global financial crisis. Whoever is got unprepared will pay the highest price.