Another Missed Opportunity

By Doug Noland

Credit Bubble Bulletin: Another Missed Opportunity

March 16 – Financial Times (Robin Wigglesworth, Joe Rennison and Nicole Bullock): “When Romeo impatiently hankered after Juliet, the sage friar Lawrence dispensed some valuable advice: ‘Wisely and slow; they stumble that run fast.’ It is a dictum the Federal Reserve clearly intends to live by, despite the improving economic outlook. There have been rising murmurs in financial markets that after years of the Fed being too optimistic on the economy, inflation and interest rates, it is now behind the curve. But on Wednesday the US central bank sent a clear message to markets that it is not in a hurry to tighten monetary policy.”

Yes, markets had begun fretting a bit that a sense of urgency might be taking hold within the Federal Reserve. But the FOMC’s two-day meeting came and went, and chair Yellen conveyed business as usual. Policy would remain accommodative for “some time.” The focus remains resolutely on a gradualist approach, with Yellen stating that three hikes a year would be consistent with gradualism. And three baby-step hikes a year would place short rates at 3.0% in early 2020 (the Fed’s “dot plot” sees 3% likely in 2019). It’s not obvious 3% short rates three years from now will provide much restraint on anything. As such, the Fed is off to a rocky start in its attempt to administer rate normalization and a resulting tightening of financial conditions.

Yellen also suggested that the committee would not be bothered by inflation overshooting the Fed’s 2.0% target: “…The Fed is not inclined to overreact to the possibility that inflation could drift slightly — and in the Fed’s view temporarily — above 2% in the coming months.” There would also be no reassessment of economic prospects based on President Trump’s agenda of tax cuts, infrastructure spending and deregulation. “We have plenty of time to see what happens.” Moreover, the Yellen Fed did not signal that it is any closer to articulating a strategy for reducing its enormous balance sheet.

Bloomberg had the most apt headlines: “Yellen Calms Fears Fed’s Policy Trigger Finger Is Getting Itchy;” “Yellen Faces New Conundrum as Conditions Defy Hike;” “The Market Is Acting Like the Fed Cut Rates.”

Ten-year Treasury yields dropped 11 bps on FOMC Wednesday to 2.49%, the “largest one-day drop since June.” Even two-year yields declined a meaningful eight bps to 1.30%. The dollar index fell 1.0%, with gold surging almost $22. The GSCI commodities index rose more than 1%. EM advanced, with emerging equities (EEM) jumping 2.6% to the high since July, 2015.

I think back to the last successful Fed tightening cycle. Well, I actually don’t recall one. Instead it’s been serial loose financial conditions and resulting recurring booms and busts. And, once again, the Fed seeks to gradually raise rates without upsetting the markets. Yellen: “I think if you compare it with any previous tightening cycle, I remember when rates were raised at every meeting, starting in mid-2004. And I think people thought that was a gradual pace, measured pace. And we’re certainly not envisioning something like that.” Heaven forbid…

In her press conference, Yellen again addressed the “neutral rate” – “The neutral level of the federal funds rate, namely the level of the federal funds rate, that we keep the economy operating on an even keel. That is a rate where we neither are pressing on the brake nor pushing down on the accelerator. That level of interest rates is quite low.”

Yellen may not believe the Fed is “pushing down on the accelerator,” yet the truck is racing down the mountain.

March 14 – Bloomberg (Claire Boston): “Companies are issuing bonds in the U.S. at the fastest pace ever… Investment-grade firms are on track to complete the busiest first quarter for debt sales since at least 1999. Firms… have pushed new issues to more than $360 billion so far in 2017, closing in on the previous record of $381 billion from 2009… That puts bond sales 14% ahead of last year’s record pace… High-yield bond offerings have also roared back after a plunge in commodity prices muted new issues last year. Junk-rated firms have sold more than $72 billion in 2017 through Monday, compared with $41.7 billion in the first quarter of 2016.”

March 16 – Bloomberg (Sid Verma and Julie Verhage): “Financial markets are telling Janet Yellen there’s more work to be done — or else. While the Federal Reserve chair raised interest rates by 25 bps as expected Wednesday, the outlook was less hawkish than market participants foresaw, with projections for the medium-term tightening cycle largely unchanged… ‘Our financial conditions index eased by an estimated 14 bps on the day — about 2.3 standard deviations and the equivalent of almost one full cut in the funds rate — and is now considerably easier than in early December, despite two funds rate hikes in the meantime,’ Goldman Chief Economist Jan Hatzius and team wrote…”

Continue reading Another Missed Opportunity

No Mere Trivia

By Jeffrey Snider of Alhambra

There is a grave misunderstanding about the reasons the Fed is “raising rates” in the first place

We are at the stage ten years later where it is still necessary to define terms. In every finance and economics textbook, the chapter on monetary policy defines “tight” money as when the Federal Reserve (or whatever central bank) raises its policy rate(s). Conversely, “accommodative” money is where it lowers the rate(s). In the US system, the technical reason given is open market operations, where the FOMC acting through the Open Market Desk of its New York Branch (FRBNY) will buy and sell securities as necessary to achieve the target rate.

From the perspective of the banking system, that means the Fed will, if pushed, provide whatever level of bank reserves necessary to keep the Effective Federal Funds rate sufficiently near the policy rate. When the policy rate is being raised, as it was in the middle 2000’s, it was in theory moving upward because money market participants fully believed that the Fed would sell bonds into the market (if needed) to reduce the level of available reserves – “tightening.”

That policy was instituted at that time because the FOMC felt the change in stance was warranted given an economy that finally appeared to be recovering from the unusually durable after-effects of the unusually mild dot-com recession. The Fed raised the federal funds rate to achieve that “tightening” so as to reduce economic momentum before it became overly inflationary. It is this assumed set of conditions which are used today to characterize the current action of monetary policy.

But on the most basic level, is that what happens? Is raising the federal funds rate truly equivalent to tightening? The answer is emphatically, unequivocally no.

Starting in the middle of 2004, Alan Greenspan’s Fed began a series of “rate hikes” meant to accomplish a “tighter” monetary stance for the reasons stated above. Between June 2004 and June 2006, the FOMC voted 17 times to increase the federal funds target, bringing it up from 1.00% to 5.25%. During that time, inflation continued to accelerate, as did all manner of other monetary indications outside of the traditional money supply statistics (the M’s, including the drastically incomplete M3). There is no way to characterize that period or the year immediately thereafter as “tight.”

From September 2007, however, through October 2008, the FOMC did just the opposite. In much more condensed fashion, the FOMC voted to reduce the federal funds target from 5.25% back to 1.00%. There is absolutely no way to characterize that period as anything even approaching “accommodative”, especially as it encompasses two of the three liquidation events associated with what was truly a bank panic (and the third one followed the introduction of ZIRP).

Continue reading No Mere Trivia

FOMC: All Those Times We Said QE Was Going to Work…

By Jeffrey Snider of Alhambra

FOMC: All Those Times We Said QE Was Going to Work, We Really Meant That it Could Work

There was an extremely odd dynamic for monetary policy during the 1990’s and especially in the United States. The less Alan Greenspan said, the more markets were convinced he knew what he was doing. He purposefully said nothing, being attributed years later with developing this “fedspeak.” So long as he continued to say nothing, the more he would have to do nothing. Again, it was a very strange time.

Twenty years on, the Fed finds itself at a far different crossroads. They have finally realized that many in the public realize there is little if any value to their capacities. That applies to several parts of the institutional apparatus, but for most laypeople it is the utter incompetence of their economic models. This is a well-worn subject, where policymakers have expressed awareness of their perpetual optimism and how unsuitable it makes, and has made, their intentions. If monetary policy is as much credibility as anything, as it certainly isn’t money, then this is an enormous problem.

And so it is becoming an extremely interesting juxtaposition, where to conduct effective monetary policy two decades ago the Fed purposefully withheld detail so as to be thought perfectly capable; now it wishes to publish some greater detail in order for the public to be reassured that it didn’t really know what it is doing. Because QE failed to deliver, they want to go back and revise history to show that despite often adamant confidence in the program(s) that outcome was actually among the probabilities their models considered but were never, ever relayed publicly.

To begin correcting this reputational defect, the FOMC has voted to start including what are called fan charts with its policy materials. As is usual, if the Fed does something new you can be assured that it isn’t actually new and was in all likelihood started either in Japan or England. The Bank of England has been publishing fan charts for a very long time, though to be fair it never had a Greenspan problem.

A fan chart is something like the probability cone the NOAA reports whenever there is a hurricane approaching the US. Because there is such a high degree of local variance (the weather and climate are the most representative examples of complex systems and therefore the low degree of predictability afforded to statistics to describe their various states) scientists really don’t have a good idea where any storm will go even up to a few days or even a few hours out. The best that they have been able to do is to determine the confidence interval applied to a map for where the models predict that it might end up in time and space. There are times and specific hurricanes where that interval is exceedingly large.

What the Fed has proposed is similar, to show the world that when it says the central tendency for GDP is near 3%, as it had too many times in the past decade, what it really meant was not that the Fed expected 3% GDP but that GDP could have been in some wide interval around 3%, an interval that also included some very low numbers that the economy did actually “achieve.” Officials, of course, did not want to do that then because they purposefully wanted you to believe in 3% GDP, particularly during the periods of QE. It is only long after QE has been shown to be at the very best poor policy do they now wish to retroactively describe uncertainty.

Continue reading FOMC: All Those Times We Said QE Was Going to Work…

Was There a Fed Meeting?

By Jeffrey Snider of Alhambra

In the aftermath of the “rate hike” in December, there was a rush to quantify, as far as expectations of political considerations may be attainable in such format, just how much the Fed would further “hike” in 2017 as a distillation of how good they figured the economy to be. As overall “reflation”, however, that was more of a media construct than a market one. Markets, as is absolutely clear, don’t seem to be too bothered by what the Fed thinks one way or another.

The mainstream may or may not remember, but the bond market surely does that the Fed expected to hike at least four and maybe six times in 2016 – it did just the one. Economic assessment is not a strength of the central bank, an all-too-constant feature spanning the distance of this lost decade. As noted Monday, internal policy discussions are far less assured, as it is only the language of external statements that seem brushed with confidence.

MR. WILCOX. We’ve been marching determinedly in a negative direction. John Stevens had a nice exhibit in yesterday’s Board briefing that showed just how much we’d taken the forecast down over the course of this year. Also, I want to just emphasize that I think the gaps in our understanding of the interactions between the financial sector and the real sector are profound, and they have, over the past few years, deeply affected our ability to anticipate how the real economy would respond, and they are continuing to do so now.

I wrote in September 2015, back when “everyone” was sure the Fed was going to start a Greenspan-like regime:

Two members in December 2013 were expecting the federal funds rate by the end of 2015 to be 2.75% or more. By March, more than half the members (10) were expecting 1% or higher for this year, including three at 2% or higher. All but two predicted at least one rate hike. In short, overheating never was, which, again, as a major nonconformity marks a truly a serious problem. Everything that has happened with regard to monetary policy has been to explain how this could happen while simultaneously trying to claim nothing has happened.

And that last sentence is, I believe, why the markets no longer really care, especially as it relates to Mr. Wilcox’s statement from 2011 that might be news only to the news media. Minor progress, perhaps, but progress all the same.

Loosening is the New Tightening

By Steve Saville

The Fed meets to discuss its monetary policy this week. There is almost no chance that an outcome of this meeting will be another boost in the Fed Funds Rate (FFR), but there’s a decent chance that the next official rate hike will be announced in March. Regardless of when it happens and regardless of how it is portrayed in the press, the next Fed rate hike, like the two before it, will NOT imply a tightening of US monetary policy/conditions.

The two-part explanation for why hikes in the FFR no longer imply the tightening of monetary policy has been discussed many times in TSI commentaries over the past few years and was also addressed in a March-2015 post at the TSI Blog titled “Tightening without tightening“. The first part of the explanation is that with the US banking system inundated with excess reserves there is no longer an active overnight lending market for Federal Funds (banks never have to borrow Federal Funds anymore because they have far more than they require). In other words, when the Fed hikes the FFR it is hiking an interest rate that no one uses.

The second and more important part of the explanation is that Fed rate hikes are now implemented by increasing the interest rate PAID by the Fed on bank reserves. That is, Fed rate hikes are now implemented not by charging the banks a higher rate of interest but by paying the banks a higher rate of interest. To put it another way, whereas in the “good old days” rate hikes were implemented by removing reserves from the banking system, the Fed now implements rate hikes by injecting reserves — in the form of interest payments — into the banking system.

So, what’s widely known as monetary tightening is now a Federal Reserve action that actually has the effect of LOOSENING monetary conditions.

Orwell’s “1984″ had the slogans “War is Peace”, “Freedom is Slavery” and “Ignorance is Strength”. Thanks to the Fed we can now add “Loosening is Tightening”.

He’ll bring them [inflation], and they will love him for it

By Notes From the Rabbit Hole

[biiwii comment: going back to posting select items of my own content here, because… why not?]

I used to make fun of the FOMC rate hike “decision” language in the mainstream media because under the Obama administration and its economic policies overseen by the Fed’s monetary policy, there really was no decision, was there? It was ZIRP-eternity, interrupted by a lone and token rate hike in December 2015 (the Dec. 2016 hike does not count because the transition to a new administration and policy regime was already known; in effect, the Fed has already made its first hike under Trump).

According to the traders who make up the Fed Funds futures, there is no decision tomorrow, either. From CME Group, we have virtually no one predicting two successive rate hikes.

cme fed funds futures

That may or may not be the case. I think everything changed with the election, and the Fed you had before is not the Fed you have today. That Fed was a promoter of inflation and a hands-on supporter of the economy and especially, asset markets. The Fed had kept its implied ‘inflate or die’ mantra and associated monetary policy in place for 8 long years. But now with the country flipped over like an egg onto its sunny side, a new administration has proven it means what it says (beginning with its blunt, heavy handed and in my opinion, misguided delineation of race and religion on immigration policy).


Focusing on the financial realm, what the Trump administration says is it is going to implement is fiscal (as opposed to monetary) policy in the form of tax breaks to corporations large and small, to tax payers, including and especially the wealthy, infrastructure building, including ‘the WALL’ (more symbolic than realistic in my opinion) and environmental and business deregulation far and wide. It is a much more business-friendly environment and keeping pure politics out of it, that is a good thing, economically.

In short, what is described above is a scenario where the administration has grabbed the policy burden from the Fed and thus, the Fed is free to do as it pleases now, no longer playing politics. The Fed knows, just as you and I know, that the indirect, and maybe even unintended aim of the Trump administration is to promote inflation. That is because they intend to promote economic growth through policy, just has the Fed has been trying to do for the last 8 years under Obama. By one method or the other, it is in the ‘promotion’ that inflation lives.

Continue reading He’ll bring them [inflation], and they will love him for it

The Daily Shot 9.22.16

By SoberLook


We begin with the United States where, as expected, the Federal Reserve has left rates unchanged. The divided FOMC, however, hinted that a rate hike is coming soon.

Source: FRB

The futures-implied probability of a rate hike by year-end is now above 60%.

Source: CME

One of the key results from the FOMC meeting – something that the media doesn’t seem to cover much – is another downgrade by the Fed of the US long-term growth. The central bank now believes (on average) that the United States economy won’t grow faster than 2% in years to come. The FOMC has been steadily downgrading its expectation for long-term growth over the past five years – from 2.65% to 1.85%.

As a result of the above, in just over a year, the Fed has downgraded the US long-run fed funds rate from 3.8% to 2.9%.

The FOMC has also been consistently downgrading the fed funds rate projections for the next couple of years.

Source: Bloomberg

In other US developments, markets remain convinced that inflation will stay benign in years to come.

Source: Macquarie, @joshdigga

According to the Mortgage Bankers Association, growth in US mortgage activity for home purchases, while still positive, has been declining.

Now let’s turn to the funding markets, where US dollar LIBOR continues to grind higher.

Continue reading at TalkMarkets →

Two Bond Guys, Post-FOMC

By Biiwii

A smart bond guy speaks, post-FOMC.  Amazingly, this interview is jumping right to a foregone rate hike conclusion in December and speculation about the Jawbone-o-rama we are going to be subjected to in the interim.  Always good to hear Gundlach, though.  Other good observations here.

“The bond market is sniffing out a pivot to fiscal stimulus…”  Gee, where have I heard that before?  Oh yes, in my own post at NFTRH.

Also, rock star bond guy Bill Gross weighs in, post-FOMC.  I didn’t say smart, I said rock star.  There’s a difference.  I see rock stars and promoters (cough… Gartman… cough cough) all over the financial market media landscape but very few smart people.  Anyway, I have not yet listened to Gross, but he’s Bill Gross… always worth a listen if not a laugh.

FOMC, July 27… Speed Readers on Your Mark!

By Biiwii

Release Date: July 27, 2016

For release at 2:00 p.m. EDT

Information received since the Federal Open Market Committee met in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate. Job gains were strong in June following weak growth in May. On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months. Household spending has been growing strongly but business fixed investment has been soft. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.


Fed Ahead

By Tim Knight

As a reminder, this Wednesday is one of the year’s eight FOMC days in which, yet again, we sit up and wonder whether (a) the Fed will inch interest rates up a miniscule amount, thanks to the oh-so-fantastic global economy or (b) the Fed will do absolutely nothing, telling us for the 972nd time that they are data-dependent. Good Lord, how can you even stand the suspense?

Meanwhile, the only thing happening on my screen that is even a little interesting is that our friend crude oil continues its gentle, consistent downtrend, and quite remarkably, for the 7th day in a row, its low and high are both lower than the previous day.