Jerome Powell wasn’t having it.
“Just close the &#%!@?! door”, he instructed his security team as they rushed him off the stage.
Powell was speaking at the International Monetary Fund’s (IMF’s) annual research conference in Washington, D.C. last week. The event lasted two days – last Thursday and Friday. Powell’s speech was the headliner.
The Fed Chair took the stage to talk about the Federal Reserve’s (the Fed’s) outlook on inflation, interest rates, and the US economy. But about a minute into his talk, a group of “climate activists” rushed the stage to heckle him.
They shouted angrily about “fossil finance” and held up a big sign in front of the audience and the cameras. It read, “Business As Usual Is a Climate Disaster”.
Of course, the media dismissed it as a random event. It’s just those feisty climate activists wanting to be heard.
But let’s think about this for a minute…
I’ve been to plenty of conferences across the country over the years. The process for getting in has always been the same—you buy a ticket online and present it at the check-in station upon arriving at the event.
They scan the bar code to validate the ticket. Then they give you a badge to wear. It signals to security that you are supposed to be at the venue.
And there’s always security. These conferences are expensive to put on. The organizers and sponsors take them very seriously.
Now, if we look at the audience gathered at the IMF’s conference last week, the majority of the crowd sported bald heads or gray hair. And they all wore business suits. The audience consisted mostly of older professionals.
Then if we look at the climate protesters, they each appeared to be in their 20’s or 30’s… with the exception of one token old guy. They weren’t particularly well-dressed. And they carried with them a massive sign that took six people to hold.
How did they get through security?
Even if we assume they each bought tickets and checked in, there’s no way security at an IMF event in Washington, D.C. would allow a rag-tag group of young people to carry a giant sign into an event featuring the Federal Reserve Chair.
That is, unless it was staged. And that’s exactly what it was.
A Secret Financial War is Raging
As we discussed last week, very few analysts expected the Fed to raise interest rates so aggressively last year. Many touted the same tired message. They said the Fed was only raising in the present to “pivot” and cut rates later in the year.
Why did so many analysts get that one wrong?
Well, it’s obvious that a large portion of the international power structure did not want higher interest rates. By power structure, I’m referring to national governments and the international institutions that have influence on policy. This includes the United Nations (UN), the IMF, the World Bank, and numerous others.
In fact, the UN proclaimed that all central banks needed to stop raising rates back on October 3rd of last year. Then the World Bank published a fear-based report saying that interest rate increases would trigger a global recession.
The mistake so many analysts made was in thinking that the Fed was aligned with those institutions. That’s why so many thought the Fed would “pivot”. They assumed the Fed was on the same team as the globalists.
And why wouldn’t they be?
The Fed collaborated with these international institutions to coordinate monetary policy when Ben Bernanke (2006-2014) and Janet Yellen (2014-2018) ran the show as Fed Chair. We didn’t have reason to believe the game would change when Jerome Powell took over.
But change it did…
The Silent Coup of 2018
Under Powell, the Fed began publishing something called the Secured Overnight Financing Rate (SOFR) in April 2018.
I doubt many people have ever heard of SOFR. Of those that have, I suspect very few know what it is, or why it’s so significant.
SOFR is a benchmark interest rate for dollar-denominated loans and derivatives. It’s based exclusively on transactions in the US Treasury repurchase (repo) market—which the Fed is directly involved in.
We don’t need to go down a deep rabbit hole on this to get the big picture.
What’s important to understand is that the Fed first began publishing SOFR in 2018. Then it gradually integrated SOFR into the financial system over the next four years.
By January 2022, SOFR became the dominant interest rate benchmark in the US. The interest rate for all loans in the US have been influenced directly by SOFR ever since then.
To understand why this is important, we must know what SOFR just replaced.
Previously, the London Interbank Offered Rate (LIBOR) was the interest-rate benchmark for dollar-denominated loans and derivatives. That means those who could influence LIBOR could also influence interest rates in the US.
And who could heavily influence LIBOR? Among others, the Bank of England (BoE) and the European Central Bank (ECB) can have an impact on LIBOR through their own policy initiatives.
What this means is that the Fed did not have full control over US monetary policy prior to 2022. That’s why Powell couldn’t raise interest rates aggressively sooner.
He used SOFR to decouple US monetary policy from the international power structure first. If he hadn’t, the ECB would have been able to keep a lid on interest rate increases by manipulating LIBOR lower.
It was all calculated.
The Fed Landed the First Blow
By raising interest rates in the US, the Fed very quickly drained the Eurodollar market of liquidity. That, in turn, limited what the ECB could do with its own monetary policy. In fact, it forced the ECB and the rest of the world to follow suit and raise their own domestic interest rates.
Now, Eurodollars are simply US dollar-denominated deposits held at foreign banks, mostly European.
The Eurodollar market exists outside the US regulatory system. And it provides liquidity to European financial institutions and ultimately European governments. They can leverage Eurodollars to support spending programs that they favor.
By draining the Eurodollar market, the Fed effectively hamstrung the ECB’s ability to drive its own agenda forward.
Which of course raises the obvious question: why?
As we noted earlier, the Fed seemed to be aligned with the ECB for years… maybe decades. On many occasions it appeared their policies were coordinated. The response to the 2008 financial crisis is a great example.
So why did the Fed break ranks?
Understanding this is the key to understanding what’s playing out on the world stage right now… and why the IMF allowed those protesters to heckle Powell.
More to come tomorrow.
-Joe Withrow
P.S. The World Bank is right – Powell’s aggressive rate hikes will cause a recession. The World Bank sees that as a bad thing… but it’s not.
Recessions are a necessary part of the economic cycle. They are healthy.
Further, I submit to you that allowing a massive recession to occur over the next 12-36 months is the only thing that can save American capitalism and the commercial banking system. More on that this week…
And for a deeper dive into everything we’re discussing, check out my book Beyond the Nest Egg. You can find it right here.