Thoughts On Future Monetary Policy, As Rumors Kocherlakota Leaked Tomorrow's NFP Number Mount

Tyler Durden's picture

Tomorrow's NFP number will be one of the most critical releases from the BLS: if on one hand the number is far greater than expected, it will effectively mean that QE3 will not begin immediately after the end of QE2, just like QE1 ended on March 31, 2010 only to see QE Lite implemented 4 months later. That the Fed is not willing to take a political gamble and send oil to $150 is conceivable, which is what would happen should Jon Hilsenrath start leaking QE3 rumors. On the other hand, the economy is once again turning lower as recent diffusion data (not to mention housing) has been indicating. Should the Fed implicitly tighten, by not loosening, the economic contraction will accelerate drastically, and capital markets will follow suit. And since as Hugh Hendry noted earlier, there is no China to pick up the slack, the stakes on the all in gamble in this bet that the virtuous cycle has picked up, will likely cost Bernanke his job if he ends up wrong and QE3 is needed anyway. Of course, as many believe, and as Bernanke himself has said, manipulating the market and stimulating inflation is and continues to be the Fed's only objective. Obviously, the waterfall effects in either direction here are huge. Which is why if tomorrow's NFP number is a beat and not just any beat but a massive one (read well over 250,000), it will be an attempt by the administration to cement the idea that the economy is now recovering. Anything at or below consensus will merely push the decision one month forward, however it will be too late to prepare the political landscape for QE3 in May, just two months ahead of the end of QE2. So tomorrow is likely D-Day on QE3 (or at least a direct continuation of POMO past the June 30 expiration date).

In this light, it is interesting to note what Morgan Stanley has to say of Narayana Kocherlakota's interview from late in the afternoon, which stipulated a 75 bps hike in rates as normal, and which caused a minor sell off into the close. According to David Greenlaw there are rumors that Kocherlakota may have seen, and therefore leaked, tomorrow's NFP number, which by implication would have to be very bullish, in order for the Minneapolis Fed chairman to have such strong words encouraging tightening.

From Morgan Stanley:

Kocherlakota's interview with the WSJ is getting a lot of attention (see article below).  My own read is that the hawks are simply getting more concerned about inflation risk given the recent turnaround in the core CPI and the elevation in some measures of inflation expectations.  The logic that Kocherlakota uses to arrive at the possibility of a rate hike of more than 50 bp later this year is fairly straightforward.  If you assume that policy was appropriate at the end of 2010 and core inflation rises by one-half a percentage point, then the policy rate should be hiked by more than 50 bp.  Of course, there are a couple of key assumptions involved here.  Kocherlakota's estimate of a one-half percentage point rise in core PCE (to 1.3%) is actually quite close to the FOMC's central tendency forecast of +1.0 to +1.5% at the January meeting (note: our own estimate is a little higher -- +1.5%).  But, Kocherlakota's starting point -- i.e., the assumption that policy was appropriate at the end of 2010 -- is one that many FOMC members would vehemently disagree with.  They would counter by arguing that the policy rate would have been much lower were it not for the zero bound. Also, they would argue that the Fed is still missing on both elements of the dual mandate -- and is likely to continue to do so for quite some time.  However, Kocherlakota has argued previously that the size of the output gap is unclear and the NAIRU could conceivably be as high as 7.5%.  This means he is less wedded to the notion that there is no inflation risk until a lot more slack is absorbed.  So, the split on the FOMC continues to widen.  Along these lines, we are anxious to hear what Dudley has to say tomorrow and what Bernanke says next Monday evening. 
Finally, I've heard some claims that Kocherlakota has seen tomorrow's employment report and that explains his hawkishness comments.  However, there is no way this is true.  Only the Fed Chairman gets the report ahead of time (late in afternoon on the day prior to release) and he doesn't even share it with the other governors -- never mind the regional bank Presidents.

If Morgan Stanley says there is no way something is true, it means absolutely the opposite. As if Ben Bernanke can keep anything to himself with Larry Meyer always holding on Line 293. But that's not the point: the issue is that if NFP comes surging then all is well, and indeed Kocherlakota indeed leaked his advance knowledge of the payroll number to the public. If on the other hand NFP comes inside of expectations, then the Fed hawks will have a reset, and a fresh opportunity to reevaluate their tightening expectations. Which is precisely what happened exactly a year ago.

On the other hand, statistics are not on the side of the employment bears: as John Poehling demonstrates, the March "Adjustment Factor", due tomorrow, has added on average 834,000 jobs with a median of 895,000 jobs and a range of 619,000-1,035,000: a 419,000 range. Which means that there are all the makings for a good spillover effect from the seasonal adjustment into the actual NFP number.

But no matter which way the NFP pendulum swings tomorrow, and if there is a blow out jobs number look for the market to take a deep dive as that loud sucking noise you hear will be the NPVing of the excess liquidity out of the market, the practical reality of the Fed selling any of its $1.4 trillion in Treasurys at the same time as the Treasury has to offload about $2.5 trillion in gross debt in the next 12 months (a rather necessary precondition to tightening), seems beyond incredulous.

Which leaves just one possibility in the open, and one which has received no discussion by the general public: namely, that the Fed will continue to monetize debt even as it hikes: a perfect compromise for the Hawks and Doves, and a process that will likely be tinkered with by Jean Claude Trichet as soon as a week from now. While the two processes are somewhat mutually exclusive, the ongoing monetization of the US debt is critical, while hiking rates may do wonders for inflation expectations. Furthermore, since the market will have no idea how to react for a good 6-9 months, the Fed will have bought the ever critical time it needs for at least one more bonus season on Wall Street before there is a another major market puke on the realization that this last ditch attempt at kicking the can down the road is a failure.

Whether this is the outcome considered by the Fed currently, we have no idea, but expect to find out soon enough.

All we know is that tomorrow's NFP number will most certainly be one very much appropriate to the whole April 1 tradition, courtesy of the BLS.

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Teaser's picture

Guess we'll know in a few hours.

Mr Lennon Hendrix's picture

As long as Bernanke gets the info 15 minutes ahead of time, everything will turn out fine.  Just fine.....

Michael's picture

So let me see if I get this strait;

The Federal Reserve Corporation regulates the amount of money in the system, prints up trillions of dollars, sets interest rates and gives the money at near zero percent to the people in their friends network. This causes my savings to lose purchasing value, causes inflation worldwide which in turn sparks revolutions worldwide.

I'm not in the Fed's friends network so I get shit on. Did I get that right? It can't be that simple a ponzi scheme can it?


traderjoe's picture

Yes, that's about right. Cheers...

Harlequin001's picture

do the same crazy shit day after day and it soon becomes normal...

SheHunter's picture

Well said.  A concise, articulate summary of the fashion in which you are getting hosed by Bennie et al.

Doña K's picture

That is correct and it also telegraphs that the money will flow into commodites. Food, oil, coal, PM's and even good art.

Those who read this blog and have some investing money, should be doing well for themselves until.....

scatterbrains's picture

The easy answer is to assume your only worth half what you thought you were by going long 50% gold and 50% cash "free from the banker's clutches". Which ever way the teeter todder  collapses, one side will more then make up for the other's loss.

MisterAmbassador's picture

"The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered."

-Thomas Jefferson


End the Fed.

CD's picture

Some previous opinions/viewpoints from Mr. Kocherlakota's 'theoretical' work:

"Planner must deter individuals from saving as much as they would like.

Intuition: unregulated asset accumulation leads to tendency to save and shirk ... [...] 


It is optimal to deter savings - a lot!

How do we best accomplish this deterrence?"

For a full book of unmitigatedly delightful Fedspeak, check out:



The New Dynamic Public Finance

Bicycle Repairman's picture

Thanks for this.  Looked over the first paper.  Intuitively I always knew this was true.  But to see it in this form gives me a chill.  Over the last 100 years this citizens of this nation have been abused by "social engineers", but this is worse than I expected.

"Intuition: unregulated asset accumulation leads to tendency to save and shirk"

They're talking about retirement here, IMHO.

Here's my intuition: The ability to front run the actions of social engineers can lead to substantial asset accumulation while allowing the accumulator solid political cover.

Mentaliusanything's picture

Mick, Mick, Mick -------- Yes we can!!!! (fuck you over anally and spit in your ass while doing it)

Normally I am the most polite person on the whole Planet, but I can see your awakening, as being one of the patsies that will pay, along with your children and great grandchildren, for this simple folly.

Can you say  

Obfuscated !!!


A Proud Canadian's picture

The issue isn't that you or the rest of ZHers understand it....the issue is that 95% + of the public don't/can't.  Sigh.

Mr Lennon Hendrix's picture

The future of monitary policy:  it will be based on gold.  But, 'It is based on gold now, because all of the central banks hold gold as their main asset!' you say.  Yes, but it will be public information the future.

SparkyvonBellagio's picture

I suggest a Ron Paul / Rick Santelli 2012 ticket.

It's the only way to be sure these A'Holes who currently pull the levers and push the buttons behind the curtain are EXPOSED as COMPLETE AND UTTER FRAUDS TO THE MASSES. I know and understand many here see this already, but it's the MASSES that need to see the proverbial light.


Mr Lennon Hendrix's picture

What about wes get some poets......

....Dylan/White '12

Or we gets some dudes that could beat some ass....

....Ventura/Piper '12

Or we get a ticket that would make Ben Franklin blush....

...Durden/Singer '12

But I would probably vote for Paul.  Then again, I have not voted for awhile, and I may never again.  I am still  bitter that I voted for that idiot Gore.  What did I know back then?

...Paul/Kucinich '12

Dr. Porkchop's picture

The '12 lineup:




Mr Lennon Hendrix's picture

At least the ads will be entertaining.

Dr. Porkchop's picture

If only Don Lafontaine were still with us to do the spots..


In a world, where suicide bankers rule the streets and the congress....


*oops, should be Weathers, not Whethers.

EvlTheCat's picture

Willie Tyler is still alive, but I thought Jessie Owens was deceased???  Does that make, and Lester, Secretary of State?

tip e. canoe's picture

that's nelson/body, not tyler/owens

(tho golden jackass/cafe americain would be interesting as well)

tip e. canoe's picture

Dylan/White '12

...from hopium to opium...

francis_sawyer's picture

Who TF really cares what the ticket is in this "Dancing With The Stars" culture...

Might as well be...






francis_sawyer's picture

++ & C. HOWARD FIELDS as Secretary of State

mrfr0gz's picture

there you go

Paul/Kucinich '12

buy shares in Kaopectate


francis_sawyer's picture

The RISK with a PAUL/SANTELLI ticket is that they get the "JFK" treatment...



SparkyvonBellagio's picture

If you look at Gold/Silver/Platinum futures as of right now you know the answer already.

Cleanclog's picture

Fed's gonna buy JGBs,  Munis, PIIGS and encourage people to stop paying mortgages.  A different kind of stim while "managing"global interest rates even while lifting FF rate.  Put a dinky bottom under $ for a few secs, then return to monetization with distraction of confusions.  All of this blur and haze is intentional.  And the Bernank, ECB and other institutions are not in charge.  It is the I banks that "get it" and control it.  In my humble opinion.

mrfr0gz's picture

and thus, we have elevated ourselves to 3rd world status?

I suppose if a loaf of bread and a gallon of gas are five bucks apiece, then the dollar becomes irrelevant.

TruthInSunshine's picture

The NFP number is not likely to be robust tomorrow, assuming seasonal employment factors were a big catalyst for upward trending "official" (although still very weak, and atypical of what they should be at this point if we were truly in economic recovery mode) employment numbers through February, and given that layoffs at local units of government have probably increased in the last couple of months.

I can't envision that robust retail, manufacturing or construction hires are in the cake, either.

As always, with highly manipulated "official" BLS numbers, subject to massive revisions (usually downwards), anything is possible, I guess.

Milton Waddams's picture

Let's connect the dots.  On one hand you have Kocherlakota making the case for a 75 basis point increase.  On the other hand you had Bernanke rationalizing the size of QE2 as follows:


BERNANKE: We tried to make an assessment of -- of -- we asked the hypothetical question, if we could lower the federal funds rate, how far -- how much would we lower it?

And a powerful monetary policy action in normal times would be about a 75 basis point cut in the federal funds rate. We estimate that the impact on the whole structure of interest rates from $600 billion is roughly equivalent to a 75 basis point cut. So, on that criterion, it seemed that that was about enough to be a significant boost, but not one that was excessive.

You don't need to be a Choctaw Code Talker to figure it out.



RobotTrader's picture

I can assure you that TPTB have their "men" at the controls, ready to push whatever buttons or levers are necessary to get the appropriate reaction after the McJobs number comes out.

One popular tactic is to let the bears have their day for 24 hours by letting the markets fall.

Then, the day after, they jam futures to incite an "in your face" 175 point rally in order to show us who the boss is.

At the end of the day, the market will go whichever way the Plutocrats want it to go.

And the PigMen already have the playbook in hand as we speak.

Once again, JPM, MS, GS, etc. will probably have another quarter with maybe only a couple of single losing sessions.  It will be another banner quarter of trading profits.

And the stocks like BID, JWN, COH, TIF will skyrocket even further as more trinkets are purchased for the incoming wave of high-end European and Russian escorts hitting the Hamptons beaches this spring.

JohnG's picture

You make good points.


I took the idea of high end retailers doing well ~1.5 years ago, and it has paid off.

Can I get through another bonus season?  I think yes.

And the ponzi goes on, until it doesn't.

JohnG's picture

And, don't be dissin' the hookers.  They actually provide an honest service.

nyse's picture

"Don't call my escorts 'whores'." - Gob B.

Mr Lennon Hendrix's picture

"She is a Chechnian prostitute and you will address her as such!" - Master Shake (ATHF)

Doña K's picture

My hubby said he wanted to go to the Hamptons this summer while I would be on a business trip. Now I know why.

Thanks for the tip.

The Profit Prophet's picture

Great post....but I junked you based on historical idiocy.  Yes I  market control is theirs, and only a fool would say no to the free money being offered by Mr. Manipulated Market. And that's exactly what the Klepocrats need everyone to do....and that's exactly why I will never do it!!!

Greed will destroy this world.....only charity can save it......and that is why there is no hope.

T.E.I.N everyone!

Id fight Gandhi's picture

Life without fed money and Pomo? They better get some 12 step programs in order. And nets and clean up crews.

barliman's picture


Non-levitating bankstas would give new meaning to suicide bombers


Seasmoke's picture

sounds like a Catch-22

monopoly's picture

Do you really think this jobs report will change anything for more than a day or two. It is over. It is too late to "take back" and start over. The massive debt, the crap that many banks still have is not going away. Derivities are still out there, trillions of them and they will haunt us until they are disposed of, and that will not be pretty. Housing is not coming back for many years. At some point we will have our own Japanese disaster, but instead of it being a nuclear one it will be a monetary tsunami.

The "funding crisis is getting closer", that is when all hell will break loose.

Nothing new here, lets move on.

TWORIVER's picture

off topic here. how about they put some damn booms around the fukorama plant in japan so they contain some of that beautiful slick in the water. If you can tell me why it won't work I appreciate it. I'm not ignorant, I am mad.