The Fed Is Playing a Dangerous Game

By John Mauldin

In an ideal world, we wouldn’t have to read the Federal Reserve’s rabbit entrails to discern the economy. But Since the Fed exists in the real world, and its decisions matter, we have to pay attention.


Just so new and perhaps even old readers know my views on the Fed: I believe we need it to handle the practical matters of the banking system plus interact with other international central banks (we live in a complicated world) and, in the midst of crisis, act as a lender of last resort and liquidity provider. I agree with Walter Bagehot’s (pronounced badget) very important pronouncement (often called "Bagehot's Dictum") that “in times of financial crisis central banks should lend freely to solvent depository institutions, yet only against sound collateral and at interest rates high enough to dissuade those borrowers that are not genuinely in need.” That rule or dictum remains wise.

I would prefer that the market set rates at the lower end as opposed to the Federal Reserve, again, except in times of crisis. I don’t believe 12 people sitting around a desk, no matter how brilliant and educated they are, can arrive at a proper market-clearing rate better than the market itself.

Seriously, LIBOR was set for decades without government intervention.

Yes, in times of crisis it got a little funky, but that is when you want the central bank to step in (and then get out as soon as possible).
Infested with Crawdads
Following Fed policy has been whiplash-inducing over the last year. It was just two months ago that Jerome Powell set off a market panic by suggesting the FOMC would do what it thinks is right and let asset prices go where they may.
They were promising at least two if not three more rate hikes in 2019. The stock market fell out of bed.

Fast-forward to now and it seems the market won and got the “Powell Put” it wanted. The Fed has given up its tightening dreams and might even loosen policy. It is even (gasp!) losing its fear of inflation.
Nassim Taleb in his book Antifragile argues that preventing small “crises” from happening on a regular basis eventually causes a very large crisis. It’s analogous to not allowing small forest fires to clear out undergrowth.
Eventually you get one very large fire which is far more destructive. The Fed assuming a “third mandate” to protect asset prices is similarly dangerous.
To understand what’s going on, we need to review some ancient history, and by “ancient” I mean December 2018. That’s several eons ago in today’s news cycle.

Recall what had just happened. The US stock benchmarks had peaked in September before weakening to create a rough fourth quarter. The Fed was continuing to raise rates even as President Trump grumbled they were hurting the economy. In early December he had called a temporary delay on higher Chinese import tariffs. That helped a little but Wall Street was still worried. The Fed seemed tone deaf.
On December 19, following a regular FOMC meeting, Powell held the usual news conference which was, not to put too fine a point on it, a disaster. The more he talked, the more markets plunged as he seemed to dismiss concerns the Fed was affecting asset prices.

I said two days later in Powell, the Third Mandate, the New Fed and Crawdads that I thought this was exactly the right move. Powell’s predecessors had given the Fed an unofficial third mandate: defend stock prices as well as maintain low inflation and full employment. His comments that day seemed to reveal Powell had no interest in continuing that practice.
As I said in that letter,
I think there is the very real possibility Powell wasn’t being tone deaf at all.
He could have wanted to remind everyone that the Federal Reserve is independent from Wall Street as well as politics.

Yes, Powell worked on Wall Street, is quite wealthy and was an investment banker, and even ran his own hedge funds, as well as numerous posts for the Treasury before he came to the Fed, so he is clearly an “insider.” He is also wicked smart, maybe even wicked brilliant. He didn’t stumble or mumble at his press conference. He was quite deliberate. He knew exactly what he was saying and I’ll bet you a dollar against 27 doughnuts he knew the market would react negatively. You cannot have his resume and not know exactly what the market would do given his quite careful press conference.

This makes me think Powell is perfectly willing to walk away from that unofficial third mandate. Is he letting his inner Volcker show just a little bit? If so… damn, Skippy, it’s about time!

The Federal Reserve should be just as concerned about Main Street as it is about Wall Street. The serial bubbles of the last 30 years all had serious negative consequences. Yes, the ride was often fun, and some of us made good money in both the up and down cycles. But Main Street would be better served with a steady-as-she-goes Fed policy.

I went on to explain how we would know if Powell were serious, metaphorically using the little creatures we call “crawdads” in Texas.

When crawdads sense danger, they start walking backwards (as in this video) to hide in their hole. Hence the Texas term, “Are you crawdadding on me?” Meaning, “Are you backing away from what you said or want back what you gave me?” It was generally not said in a polite manner. To crawdad on someone meant you broke your word.
If Powell lets the markets fall and doesn’t crawdad on us without coming back and giving a speech essentially saying “I’m sorry, I really meant to be more dovish,” then we will know he really wants to end the third mandate. That would make me stand up and applaud. Loudly and with enthusiasm.
Unfortunately, I am not applauding in that way. Powell is crawdadding as fast as one can without actually changing species. I now wonder if he was serious in the first place.
Recall how FOMC meetings go. They have two days of meetings, issuing a policy statement mid-day on the second one, followed by a news conference with the chair.

On December 19, Powell told the media,
“Many FOMC participants had expected that economic conditions would likely call for about three more rate increases in 2019. We have brought that down a bit and now think it is more likely that the economy will grow in a way that will call for two interest rate increases over the course of next year.”
But the minutes of the meeting he had just emerged from, which were released on January 9, said,
“Participants expressed that recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier. Against this backdrop, many participants expressed the view that, especially in an environment of muted inflation pressures, the Committee could afford to be patient about further policy firming.”
Now, Fed statements are so dense you can probably argue these are consistent. But it sure looks to me like the FOMC observed market volatility and decided they should be “patient about further policy firming.”

That is not at all the impression Powell gave in public that day. Markets would not have fallen had he talked about patience. They would have more likely rallied.

So what was going on? I wish I knew. The minutes don’t identify who said what, so possibly this reflects some disagreement on the committee. Maybe Powell wasn’t among the “many participants” who thought patience was in order. I doubt that, however, because other speeches and statements since then show the FOMC getting steadily more dovish.

In December, I said that raising the benchmark rate while they were also reducing the balance sheet was a mistake, and they should do one or the other. Now they seem intent on stopping both soon, with Powell’s full assent. That was nowhere on the radar screen just three months ago.
In theory, central bankers are supposed to worry about inflation. The Fed and its peers in other countries exist partly because their governments tired of dealing with out-of-control inflation. Not that they are against inflation completely; they just want it to happen on their terms.

For the Fed, acceptable inflation is 2%, as measured by PCE (not the better-known CPI). It ran below that level for most of this growth cycle and is only now catching up. So they should be happy. They are not.
Last week Richard Clarida, the newly-installed Federal Reserve vice chair, told a monetary policy conference at (where else) the University of Chicago that the Fed might give itself a little do-over. Without changing the 2% target, they would consider allowing a period of above-2% inflation to compensate for the years it was below the target.

We’ve heard this before. Fed officials talk sometimes about letting the economy “run hot” since it was lukewarm for so long. They haven’t done so because the economy hasn’t wanted to run hot. It has not been an option recently. What would be “hot” in this context is unclear. Maybe 4% real GDP growth? If that’s what they now consider unusually strong, we have bigger problems. 2018 appears to have been the best year since 2005 at roughly 3% growth.
In any case, this is a dangerous game, mainly because the Fed has little control over how such inflation would be distributed. If it shows up mostly in asset prices, it will reward the wealthy and punish the lower 80%, who will face higher costs for housing, health care, and other essentials. That is a political problem, as we’ll discuss below.
Then this week, Powell went to Capitol Hill for his semiannual congressional testimony. He specifically noted the Fed is watching the markets: “Financial markets became more volatile toward year end, and financial conditions are now less supportive of growth than they were earlier last year.”
Powell went on to say the Fed remains “data dependent” and that it could adjust the balance sheet based on “financial and economic developments.” My friend Peter Boockvar noted in one of his multiple (and highly valuable) daily letters that Powell really meant “S&P 500 dependent.”
Jay Powell is implicitly saying to Congress that the Q4 direction of the stock market is the number-one reason why they have become more flexible with rates and its balance sheet. Weakness in China and Europe is number two. Thus, keeping asset prices elevated is officially the #3 mandate of the Federal Reserve.
That, my friends, is what I meant by crawdadding. Powell has turned the other direction and is now bent on pleasing investors, the exact opposite of the impression he so carefully gave in December.

Why the change? Did the economic data change significantly? I don’t think so. My best guess is Powell simply got cold feet. He is worried about recession on his watch and wants to prevent it if he can, or at least make the Fed look less responsible for it.
Michael Lebowitz summed it up:
Over the last year, the market has struggled as the Fed steadily reduced the size of their balance sheet. The S&P 500 is unchanged over the past 13 months. The liquidity pumped into the markets during QE 1, 2, and 3 is being removed, and asset prices which rose on that liquidity are now falling as it is removed. The Fed is clearly taking notice. In December Jerome Powell said the QT process was on “autopilot” with no changes in sight. A week later, with the market swooning, he discussed the need to “manage” QT. “Autopilot” became “manage” which has now turned to “end” in only two months.
If the Fed’s mandate is to support asset prices, this behavior makes sense.

To the contrary, the congressionally chartered mandate is clear; they are supposed to promote stable prices and full employment. Our concern is that capital markets, which are heavily dependent on the Fed and seemingly insensitive to price and valuation, are promoting instability and gross misallocation of capital. One cannot fault markets; they are responding as one should expect on the basis of Fed posture and the prior reaction function. Markets are properly agnostic under such circumstances. It is the Fed that has created an environment that leads markets to react in the ways that it does.
Remember, the “Bernanke Put” didn’t end the Great Recession or the bear markets that accompanied it. The Powell Put is no more powerful. Can it have short-term, market-friendly results? Absolutely. For longer than we might think? Assuredly. Can corporations continue to build up high-yield debt to unsustainable levels? They’re trying. As long as the music keeps playing, they will continue to dance.

I think Powell is probably changing course too late, but he might buy another year or so. And given where we are in the electoral cycle, that could make a difference. A recession starting in early 2020 would certainly make Trump’s reelection path more difficult. Further, merely postponing recession won’t make everyone fat and happy.
Specifically, it is quite possible and even likely that a Fed decision to keep policy soft and let the economy run hot will raise middle-class living expenses faster than it raises middle-class wages. That will make it easier for Democrats to argue the Trump policies aren’t delivering the promised results. Then in January 2021 we could see a hard-left Democratic president with solid majorities in both House and Senate. Taxes will rise sharply soon after, as will the deficit when those who argue for more federal spending and even MMT proponents start getting their way.
There is no free lunch. Large deficits will have a cost. Yes, more QE of $3 trillion or $6 trillion or more is possible. As I will demonstrate in a future letter, the cost will be slower economic growth and greater wealth and income disparity. It may not be a crisis, but more of a slow grind that requires a different investing mindset.

I don’t want to be pounding the SIC at you, as like I said we are going to sell out, but that is one of the questions that I have brought this specific group of speakers together to answer. I want to dig a lot deeper and broaden my own understanding. This is going to be one of the most important topics that we face in the coming years. Hope is not a strategy.
Right now, investors seem happy to have the Fed back on their side. I think we may regret having that wish granted.
Cleveland, Austin, and Dallas
As you read this letter, Shane and I will be flying to Puerto Rico. Week after next we fly to Cleveland where I will speak to the local CFA group on Tuesday, have my left eye cataract surgery on Wednesday, then jump over to New York to catch a show with Barry Habib and on Sunday have lunch with our great friend Suze Orman. We’ll then fly back to Cleveland to hopefully do my right eye. Then if all works right in a final checkup, I fly to Austin to do a client presentation and up to Dallas for another client presentation the first week of April. And then hopefully back home to Puerto Rico.

I am writing this letter in Houston at what used to be the old Warwick Hotel when I went to Rice University. Over the years it got a little dated but then was bought and made into a Zaza hotel and is now my new favorite Houston hotel. I go to a Rice University Economics Council meeting in just a few minutes.

Have a great week. I hope yours has been less hectic and stressful than mine. I can see a Sunday with some beach time, some gym time, and maybe even a little driving range time. Puerto Rico does seem to take some of the stress out of life. All the best…

Your not happy with Fed policy analyst,

John Mauldin
Chairman, Mauldin Economics



Fed appears cornered after averting self-fulfilling meltdown

Short-term support for an economy in good health opens door to a surge in volatility

Seema Shah

Fed chairman Jay Powell is challenging the widely accepted view that policy rates act with a lag © Bloomberg

Not long after indicating further gradual increases in rates were on the horizon, the US Federal Reserve two weeks ago made a mysterious U-turn and signalled that its hiking cycle was over for now. This perplexing decision led many to believe it was a response to red flags about the US economy.

Doubtless, the global economy has slowed. But the various measures of US economic performance are almost universally strong. The latest ISM manufacturing survey rebounded smartly, indicating solid growth; retail sales have remained strong; inflation is near the Fed’s 2 per cent target; and the latest jobs report showed tremendous payroll growth, beating consensus expectations by a wide margin.

The US economy is in rude health — recession fears were, and are, overdone. Jay Powell, the Fed chairman, pointed to factors such as slowing global growth, tighter financial conditions and geopolitical trouble. Yet on all three counts the world is more positive: stimulus measures introduced since last June should eventually stabilise China’s economy towards the second half of the year; the Bloomberg US Financial Conditions index is at its strongest in nearly three months; and negotiations between the US and China are reportedly progressing.

It seems more credible that the Fed’s decision is predicated on two factors. First, lingering slack in the labour market. The January employment report highlighted that robust economic growth continued to pull workers back into the labour force, pushing the participation rate higher and keeping a lid on wage growth. It is almost inconceivable that the labour market is operating at full capacity yet.

Second, a capitulation to markets; investors perennially talk about the “Fed put”, counting on the central bank to support equities by shifting to easier money when times get tough.

There is method to the madness of the latter. Market tantrums can feed on themselves as confidence starts to plummet — self-fulfilling market meltdown. If financial conditions deteriorate significantly, negative market performance might weigh heavily on business investment intentions and consumer confidence. This script appeared to be playing out in December. Investors seemed to catch the idea that a recession was on the cards precisely because the stock market was going down. As the market stumbled, sentiment among business leaders dropped too.

In December’s Duke CFO Global Business Outlook survey, nearly half of respondents said they thought the US would be in recession by the end of 2019, with 82 per cent predicting a slump before the end of 2020. The risk was that falling stock markets convinced business leaders that a recession was coming, and they began hunkering down to create the conditions to bring on a mild recession. Financial markets were at risk of not just being a leading indicator of recession, but a driver.

We exist in the perfect climate for the next downturn to be the result of a collapse of confidence.

At the time of the previous financial crisis there were approximately 300,000 tweets per day; 10 years on, there is more than this number in a single minute, or more than half a billion in a day.

The echo chamber to amplify market anxiety has never been greater.

The risks are significant. US corporate debt has reached record highs; a further deterioration in financial conditions could have quickly led to a sharp rise in corporate defaults, with clear negative repercussions for the broader economy.

By allaying concerns over policy overtightening, the Fed has avoided this scenario — for now. It has unleashed “animal spirits”, greatly reducing the risk of a self-fulfilling meltdown in the near term. It is difficult tactically to be short risk assets; robust growth and a patient Fed is certainly a favourable mix.

But as relief charges through equity and credit markets, there remains an inescapable fear that perhaps the Fed’s short-term support for an economy that was already in good health opens the door to a surge in volatility later in the year. A strong pick-up in growth from here is surely not desirable.

If job gains continue, the labour market will eventually reach full employment. Higher operating and labour costs would follow, driving up inflation. Inevitably, the Fed would have to reverse its recent dovishness. But by patiently waiting to see higher inflation materialise before it kicks back into action, Mr Powell is also challenging the widely accepted view that policy rates act with a lag.

The Fed would be on the back foot, forcing it to play catch-up by slamming on the brakes.

Responding to rising inflation with a delay can be just as damaging as acting prematurely. It may not be easy for the Fed to resume rate hikes without risking renewed collapsing confidence, throwing markets once again into disarray.

The equity market rally may have been extended but risk appetite will eventually be challenged again — and while the risk of a recession in 2019 is lower than it was two weeks ago, the risk of a recession in 2020 has now surely increased.

The aphorism that “expansions don’t die of old age, they are murdered by central bankers” was written for times like these. Enjoy the risk ride while you can.

Seema Shah is senior global investment strategist at Principal Global Investors

Google, Fake News, and the Crisis of Truth

When the Internet became a standard utility, it was widely believed that we were giving every friend of the truth the technical means with which to contribute, boldly but modestly, to the adventures of knowledge. Instead, we convened a feeding frenzy.

Bernard-Henri Lévy

PARIS – Invited by Google Europe to attend a brainstorming session in Paris on the decline of truth, the rise of fake news, and ways to counter both, I began my presentation by placing the problem in historical context.

I cited George Orwell’s Looking back on the Spanish War, in which the author explains that, for him, “history stopped in 1936,” because it was there, in Spain, that he discovered for the first time “newspaper reports which did not bear any relation to the facts.” It was there that he sensed that “the very concept of objective truth,” ruined by fascism in its red and brown forms, was “fading out of the world.” And it was there, in effect, that men like Joseph Goebbels (“I’m the one who decides who is Jewish and who isn’t”) and later Donald Trump (and his “alternative facts”) became possible.

But, as I went on to point out, several intellectual shake-ups occurred before and after the rise of totalitarianism.

First, the Kantian “critique,” which separated the noumenal from the phenomenal realm, limited our knowledge to the latter, and posited that we can know phenomena only to the extent that our senses, understanding, and reason allow. This critique injects into our relationship with truth a measure of subjectivity of which Brexit’s proponents might be today’s willing victims.

Second, a Nietzschean “perspectivism” turned truth into a “point of view” and judged to be “true” that point of view that makes a being stronger, and “false” that which saddens or diminishes him. It triggered a second intellectual earthquake, the aftershocks of which necessarily rippled through political systems, giving rise to the metaphysical possibility of leaders like, say, Vladimir Putin.

And, third, there was the “deconstructionism” of the post-Nietzscheans. By historicizing the “will to truth” (Michel Foucault), putting truth “in quotation marks” (Jacques Derrida), separating the sign from its referent (Louis Althusser), and miring the obvious in a miasma of charts and graphs (Claude Lévi-Strauss) or tying it up in Borromean knots (Jacques Lacan), they probably caused us to lose contact with the simple, robust, and irrefutable aspects of the truth.

I then focused on the responsibility of the Internet and GAFA (Google, Apple, Facebook, and Amazon) for the following sequence of events:

First, an almost infinite amount of speech is set free by digital democracy.

The web then becomes a crowd, a free-for-all, where everyone shows up armed with his or her personal opinions, convictions, and truth.

And, at the end of a shift that was nearly imperceptible amid the virtual roar of tweets, retweets, and posts, we demand for our newly affirmed truth the same respect that was paid to the old truth.

We started with the equal right to express our beliefs. We wound up conceding that all expressed beliefs have equal value.

We began by asking simply to be heard, then demanded that listeners respect our utterances, whatever they may think of them, and ended by warning them not to rank one statement above another or assert that there might be a hierarchy of truths.

We thought we were democratizing the “courage of truth” that was so dear to the later Foucault. We thought we were giving every friend of the truth the technical means with which to contribute, boldly but modestly, to the adventures of knowledge. Instead, we convened a feeding frenzy. Truth’s body was laid out on the table and, fueled by a cannibalistic urge, we set to tearing it apart. Each of us stitched together a patchwork of certitude and suspicion from the bloody, putrid shreds. And this spectacle promptly gave way, minus Hellenic elegance, to the perversity of a new generation of Sophists holding that truth is a wavering shadow, that man is the measure of all things, and that the truth of each is precisely equal to that of his neighbor.

Given this, and because Google Europe was hosting this event, I proposed to Carlo d’Asaro Biondo, the company’s president for partnerships and strategic relations in Europe, the Middle East, and Africa, three concrete and eminently strategic ideas.

The first proposal is a hall of shame, where, in partnership with the world’s 50, 100, or 200 largest newspapers, the most dangerous fake-news items at any given moment would be listed in real time.

Second, a competition on the model of France’s eighteenth-century academies (from which no less than Rousseau’s two Discourses emerged) would be held. Denizens of the web would propose a document, video, or other work whose power of truth or satire could neutralize the most harmful fake news, with the winner funded to produce the proposed work.

And, finally, two and a half centuries after Diderot, a new encyclopedia – yes, an encyclopedia, a real one, the opposite of Wikipedia and its turbid entries – would be produced. Who other than one of the global tech firms has the power – should it decide to use it – to bring together thousands of real scholars capable of drawing up an inventory of the knowledge currently available to us in every discipline?

The choice is clear: Encyclopedia or ignorance.

Mend the fabric of the truth or resign ourselves to its definitive rending.

Plunge deeper into the Cave, dim and clamorous, or begin to look for the way out.

I would not want to lend undue importance to a single Google event. But couldn’t it be taken as a wake-up call, a challenge to begin a process of critical questioning? Might not those who are responsible for the worst be willing to shoulder some responsibility for repairing the damage, for building up after tearing down? If not them, who?

Bernard-Henri Lévy is one of the founders of the “Nouveaux Philosophes” (New Philosophers) movement. His books include Left in Dark Times: A Stand Against the New Barbarism, American Vertigo: Traveling America in the Footsteps of Tocqueville, and most recently, The Empire and the Five Kings.

Why Banks Can’t Be a Bridge Over Troubled Markets

When prices fall, capital charges can rise at banks as recent earnings reports show

By Paul J. Davies

UBS, Deutsche Bank, and Société Générale are among the banks pointing to a rise in market-risk-related measures of their risk-weighted assets, which is the balance sheet calculation used to set capital requirements.
UBS, Deutsche Bank, and Société Générale are among the banks pointing to a rise in market-risk-related measures of their risk-weighted assets, which is the balance sheet calculation used to set capital requirements. Photo: arnd wiegmann/Reuters

Banks are struggling to play their traditional role of supporting troubled markets. During the next crisis, central banks could be forced to take on the job.

The sharp rise in volatility in the final of quarter of last year led to lower capital ratios at several European banks according to recent financial reports. The cost in capital terms wasn’t huge, but it highlights the way that bank capital rules can exacerbate market wobbles by making banks even more wary of taking risk just as investors want help to unload assets or hedge their exposures.

The next crisis in finance is more likely to be caused by a run on investment funds than by the kind of run on banks that took the last crisis global. Regulators are concerned about potential problems with market liquidity because many funds promise that investors can get their money back at very short notice, even when the assets they hold aren’t that easy to sell.

Since 2008, banks have lost some ability to act as shock absorbers in markets by buying up stocks, bonds or other assets from investments funds and then selling later when markets settle.

This is because changes to global capital rules have made it much more expensive for banks to hold inventories of financial assets.

However, there is an added dimension to the rule changes, which recent bank results illustrate.

When markets tumble, an important measure of how much money they could lose in any given day—known as Value at Risk (or VaR)—tends to increase. That leads to a rise in the amount of capital banks must have in place to cover market risks.

Deutsche Bank AG, Société Générale S.A. and UBS Group AG all pointed to a rise in market-risk-related measures of their risk-weighted assets, which is the balance sheet calculation used to set capital requirements. Analysts at RBC Capital Markets pointed to this increase in market risks as the reason for several banks missing their targets, or investor expectations, on year-end capital ratios. 

Several U.S. banks also reported a rise in the amount of market value their businesses could lose in a single day. But it didn’t have the same effect on capital at JPMorganand Citigroup ,for instance, because of other cuts to assets in their markets businesses.

But for all banks, the pain of higher capital charges due to falling prices incentivizes them to take less market risk just when investors will want banks to act like strong market makers and help them get the cash they need to repay clients.

This is a problem for central banks, too. When the next market crisis comes, they may have to become market-makers of last resort. Supporting the whole financial system directly in this way will likely look a lot more complicated and risky than doing it through banks, and some politicians may fight to stop it happening. That will be painful for everyone.

Matteo Salvini talks up seizing control of Italy’s gold reserves

Using asset to fund spending ‘an interesting idea’, says deputy prime minister

Miles Johnson in Rome

Matteo Salvini: ‘The gold is the property of the Italian people, not of anyone else.’ © AFP

Matteo Salvini has raised the possibility of wresting control of Italy’s sizeable gold reserves away from the country’s central bank in the latest in a series of threats to the independence of the Bank of Italy by Rome’s populist coalition.

“The gold is the property of the Italian people, not of anyone else,” Mr Salvini, deputy prime minister and leader of the League party, said in comments to reporters on Monday.

The comments came after he called for the removal of the leadership of the Bank of Italy for failing to prevent the country’s banking crisis, prompting Giovanni Tria, economy minister, to defend the independence of the central bank.

Italian media reports have suggested that the coalition government, formed of Mr Salvini’s anti-migration League and the anti-establishment Five Star Movement, were considering using part of the central bank’s gold to fund their spending plans.

Mr Salvini said he had not studied the notion of selling Bank of Italy reserves to fund additional government spending in detail, but that “it may be an interesting idea”.

Claudio Borghi, a Eurosceptic League member of parliament and close economic adviser of Mr Salvini, has proposed a law to ensure that the Italian state was recognised as the ultimate owner of Italy’s gold reserves rather than the Bank of Italy.

Nobody wants to sell the ingots, in fact, quite the opposite, we want to prevent others from having their hands on it,” Mr Borghi wrote on Twitter after Mr Salvini’s comments.

Beppe Grillo, the comedian and co-founder of Five Star, last September suggested that Italy could sell off gold to fund higher state spending.

“It would allow us to finally put an end to this annoying story about the fact that ‘there is no money’,” Mr Grillo wrote then. “Why do citizens have to sell their necklaces and not the state?”

The Bank of Italy has the third-largest central bank holding of gold reserves in the world after the US and Germany, owning 2,452 tonnes at the end of the third quarter of last year, according to the World Gold Council.

Mr Salvini also played down the possibility of instability within Italy’s populist coalition after his League party swept aside the Five Star Movement in regional elections held on Sunday.

Mr Salvini said “nothing changes” in the coalition after a regional vote in the small Abruzzo region in central Italy saw a rightwing coalition candidate supported by the League take 48 per cent of the vote.

The campaign in Abruzzo, which has a population of just 1.3m, has generated more domestic attention than usual as a curtainraiser for May’s European elections which will see Mr Salvini and Five Star, led by Luigi Di Maio, battle each other for votes at a national level.

Five Star’s candidate came in third, trailing the centre left with just 20 per cent of the vote or half the level it achieved in the region in last year’s general election.

“It’s a vote in Abruzzo and I don’t think our Five Star friends have anything to fear,” Mr Salvini said, as he moved to play down speculation that the result could intensify intra-coalition tensions.

Since Five Star and the League formed the “government of change” coalition, Mr Salvini’s anti-migration platform has helped him overtake Mr Di Maio in national opinion polls. In polling for the European elections, the League is forecast to crystallise its lead over Five Star on a national scale.