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On Trading Central Tendency
It’s been about a week since the Federal Reserve announced its new policy of providing information to the public regarding the direction of US interest rates. The new policy is not, generally, a surprise. The Wall Street Journal’s Jon Hilsenrath told us something was coming weeks ago. I've been pondering whether this is a positive or a negative development. I’ve concluded that this step by the Fed will backfire and will prove to be a mistake.
It’s tough to argue against a policy of more disclosure by the Fed. The members are a secretive bunch to begin with. Most people have a level of distrust of the Fed. More information about what they are doing and why, would be helpful. However, I believe the decision to provide more info has nothing to do with the Fed wanting to be more open and lovable. The Fed has taken this step in an effort to make its current policy decisions more effective.
I think any policy of the Federal Reserve should be designed to stand the test of time. It must be effective in all anticipated future conditions. The move by the Fed may well achieve the desired short-term objectives. Businesses, investors and individuals will have a greater degree of certainty regarding the future direction and timing of changes in interest rates. On balance, the additional information should have mildly positive consequences on new capital investments by companies, the process of capital formation in the markets, and it might allow individuals to make better long-term investment choices. What’s not to like?
The Fed currently publishes information regarding the thinking of the Fed members on both GDP and inflation (the SEP report). I was surprised to see that the revised report will now include a projection for the likely timing of the first rate hike. (This aspect of the Fed's release was not in the WSJ article.)
The 12 Fed governors will provide their estimates of when the first rate hike will occur. The top and bottom three will be excluded. The full range of estimates could, for example be from 2013 to 2016. But the narrow estimate would be more precise. It could be from June 2013 to June of 2014.
In the above example, the “Central Tendency” of the expectation for a change in Fed policy towards a tightening stance is a very specific date - it would be December of 2013. This date is far enough away from today that any concerns about rising rates should be eliminated. As this information is transmitted through the markets, it should have a beneficial effect. Where’s the beef?
Consider what happens with the passage of time and changing scenarios.
-With each additional quarterly report, there will be time decay. From the first report, the Central Tendency will be (in my example) 20 months away. Unless the Fed governor' consensus changes, the timeline for a rate hike will get closer with each report. Not a big deal for the second report. But by the third report, the Central Tendency will fall to only 11 months (assuming the Fed's estimates don't change). While still months away, I think that markets and businesses will begin reacting to what is a big warning sign (and a specific timeframe) for a contraction.
By establishing a date certain in the mind of the market, the Fed will have drawn a distinct line in the sand. As we get closer to the line, there will be, inevitably, indigestion.
-Most likely there will be changes in the Central Tendency as individual Fed Governors throw in their two cents each quarter. What might happen if it is announced that the CT has been pushed farther out by four additional months? I think we would get headlines that look like these:
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-A change bringing the CT for a rate hike forward by three months would be even more dramatic. The headlines might look like this:
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We will inevitably go through short-term changes in economic measures. In one quarter, inflation may be on the hot side. In another, the economy could be showing signs of weakness. (We had exactly these conditions in 2011, when oil spiked up and we had a tsunami that had global short-term consequences.) Fed policy should look through these events. In fact, the Fed correctly anticipated that the shock in Japan and the spike in oil would be short-lived. But the Fed potential flip-flopping (either way), and changes that are made to the CT, creates the possibility of confusion by all concerned. We might see these sorts of things as a result:
.
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There are several other headlines we might see as a result of the increased information the Fed will provide:
Sometime after that headline we might get this one (I would love it).
Or we might see something like this:
My bottom line is that the Fed may have helped its cause in its battle with (perceived) deflation. But it will backfire as time passes and the necessity to normalize monetary policy nears. I think the Fed will come to hate regret this step. So will the markets.
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The big plus in the long run though is that this will show how little the FED really knows about the future! The Future will always end up surprising them.
I don't know what you're talking about but the blonde looks like she wants to kiss me, so I'm leaving the page up.
Not a bad thesis and hilarious parody names.
Well done, BK.
The Fed is extremely desperate to appear "open and fair" and "communicative". The 99%ers are wandering up and down Liberty Street eying them with suspicion, but not yet comprehension. Ron Paul, their strongest enemy, is gaining in the polls. Should the sheeple awaken and demand answers, the Fed's game is over. Done. Go directly to jail, do not collect $.01
The Second American Revolution is now and the Banksters are shitting sharp edged bricks of fear and experiencing severe rectal bleeding.
This is a PR stunt, not a fiscal policy tool.
This is a total smackdown by The Bernank vis a vis "all the others"on the Board. How can the Chairman ever be wrong? All the Board must agree with "wtf" is going on first...and then they come up with some type of consensus...and then the Chairman decides (just like what's going on already, right?) Obviously this is light years ahead of Captain Insane-o Alan Greenspan...who was so caught in the Jazz Music coursing through his synapses he forgot that by inverting the yield curve for two plus years he would blow up the entire global financial system. (Oooops.) The utmost of baby steps and the entire friggin' (former) financial establishment goes ape-shit. LIGHTEN UP PEOPLE.
The Fed has recently been running up the flagpole the notion that they will switch from their dual mandate of 'maximum employment and stable prices' to a new objective of inflation targeting.
'Inflation targeting', like the word 'terrorism', can cover almost any situation one can imagine... So, the Fed can announce years in advance a plan to raise rates and then suddenly alter the plan due to 'inflation targeting'.
Certain 'friends of the Fed' will be privy to the plan change in advance but 99% will know nothing until one fateful Monday morning.
I don't believe the Fed will raise rates in 2013 or in 2014... in fact, I don't see a date certain that will see a rise in Fed rates.
What I do see is more jawboning by the Fed to fool the few rubes that continue to take seriously whatever the Fed happens to be currently releasing to the bobble heads on main stream media.
When the Fed allows an audit of the gold stored in the US (both what is owned by the Fed and that which is owned by the US Gov and other soverigns) I will believe that the Fed is becoming somewhat transparent.
I appreciate your posts, Bruce, and your humor... but I would take anything the Fed has to say with more than a grain of salt.
orly ... i much prefer increasing liquidity , by moving my funds from the sideline , into a nice tight market .... i have to admit , tho, that this movement doesnt necessarily prove to be either safer or more secure for me , often quite the reverse , which of course, makes it a whole lot more exciting . Dinner?
i see, so the fed wonks that created this fear are going to abate fear with more disclosure.
ok, that works for me.
keep adding phys...
it is simple-they can go fuck a duck.
Krasting quit your day job. You're getting too good at this.
As a retail mid-term equity trader/self-investor, you realize even if I hired a 1000 monkeys and worked at it 24/7, the 1001 of us could barely put a dent in the sell-side/pump/dump/booktalk/GS-fuck-me-in-the-ass/send-in-the-dumb-money horseshit which saturates everything everywhere each day.
On a simple binary yes/no issue 70% of it is wrong. That's a real fucking statistical trick. And in varying degrees the other 30% get pissed off because they were betting against the fertilizer they were selling, and it didn't work out.
If I turn on CNBC for 45 seconds to get the HD screen mash-up of numbers from every market.. whoever is talking and the bottom ticker, put me into and hour and a half with a mop and bucket to bail the sewage out of the room.
Meanwhile, the Fed is trying to run their 23rd version of a 3 Card Monty, and they are counting on the entire Financial Noise Hurricane to get their desired net effect of the day correct and in command of markets? Their last PR/Communications firm had to bow out because 1/2 of the copy staff committed suicide stressing over how the words "may" vs "might" will be handicapped by an entire Industry who are socio-psychopaths, with the remaining sane people forced to think like socio-psychopaths to beat the rest of the herd.
The Fed has taken this step in an effort to make its current policy decisions more effective.
You got it. Stop there. And future decisions, too. The CBOE is already 3/4 the way through analysis for the CentTend Index.
Either you are controlling the narrative, or you are just lining up with everybody else on the bulkhead, waiting to see if it's glassy waters or 20 ft swells today.
D'ya think those "PhD"s have had enough of the Noise Machine fucking up their plans? you big guys in the Bond/Credit and FX Markets have been a pain-in-the-ass along the way. And this won't magically change that. But i bet it will tweak it and impact modulation.
What part of the "new transparency" is out of line with Centralized Planning? It's a goddamned fundamental of it.
Once they open that communications tunnel, and it gets us Main Street Rabble's attention, coloring book explanations are going to rule our little Russell playpool. You know how dearly Bernanke loves it. (Poor Ben, after the 3rd massive evacuation in 3 yrs from the equity markets by us rabble, Ben is going to be very disappointed when that little twitch in the FoF, becomes clear that we Rabble are paying our food and electric bills, with what we pulled out this time.)
March is coming they are going to want a bully-pulpit.
There may even be a "believe me, or your lyin' damned eyes? moment. ;)
Your stuff is great Krasting. Do the funny stuff if you want.
Just keep splittin' that apple with the stuff that counts.
It is so ZH.
Bishop
The last duty of a central banker is to tell the public the truth! This is just another tactic by the Fed to portray they are being more transparent, yet we find half truths and lies from all mouths of the Fed every week!
All TV is total shit and Hopium for the stupid sheep and serfs. CNBC is some of the biggest trash for drooling morons to watch. Santelli is good but I stopped watching the islamic's tdiot brainwashing HD box year sand years ago. F TV and morons who watch O TV.
But mah tawk radeeooo spakes the trooth.
ONE of your best Bruce. Great way to start the week, informed, laughing and alerted.
we appreciate you boy
End the Fed.
listen Bruce you poor child. i saw fed member Fisher on Larry Kudlow asked about the fed bailing out EU, and the man had these funny shaded glasses which bely the point that he was lying through his teeth the whole way. how do i know this? i have raised small children. the only reason some people actually believe their kids is that their school teachers have filled THEIR heads full of crap (head master Obama by example)
hi i'm going to tell the truth now, but i've been lying to you for a long time. you can trust me now.
Remember last January when the Fed was forecasting 3.4-3.9% growth for 2011. I do.
http://federalreserve.gov/newsevents/press/monetary/fomcminutes20110126.pdf
Self-Fulfilling Prophesy Forecasting equals Pure Moral Hazard
It has been proposed au contraire that Fed action on a look back basis of a few or several months makes more sense...http://www.mendeley.com/research/monetary-policy-selffulfilling-expectations-danger-forecasts/ by economists not submerged in the sole notion inflation (poorly defined itself) fighting is a noble sellable cause and somehow an area economists and central banks control -not.
Self-Fulfilling Prophesy Forecasting leads to all possible variations of conundrums per cause and effect. The notion that the FED determines anything to occur through its actions is dubious to begin with...Moving into the realm of further 'broadcasting' its intentions moves FED economic actions even farther from material economics related to reality to pure propaganda voodoo mind games(Pure Moral Hazard) as the FEDzers will then claim credit for or disavow the results real or imagined of their actions, projected actions, projected results, revised actions from previous projections, inactions due to projections...a hopeless mess. --Yet a fitting and apt pathetic culmination of the pseudo-science of economics this century.
It doesn't get any dumber than this. The fail wags the bog. Economics has now transformed into a new field MEDIANOMICS.
BREAKING - Fed invents means to mass hallucination without drugs!
Zero Respect!
LOL
The Fed pretending to want to be more open and friendly is like the registered sex offender on the block putting out bunny rabbits at Easter: just plain creepy.
Nice possible headlines and captions; I think you have Bob Pisani down especially.
Disinformation is easier if you release a higher volume of information.
Isn't it, though, an attempt to bring some stability to the markets? I can't imagine that they would advertise a definitive date for such a step and then pull a "jus' joshin'" on the markets.
It seems the Fed knows that it is uncertainty that is making things unstable and expensive for traders. Uncertainty and instability can make one schizo, as you pointed out in your earlier post- and that could be really, really bad for the Euro. They need all players on deck, including the home-gamers who have been pulling money out of the market for months. If nothing else- and if they can stick to their own program- the move will increase liquidity in an overly tight market by moving money off the sidelines, into a safer and more secure market. <<smirk>>
I know you don't seriously believe that the Fed will allow the SEC to sanction options on possible interest rate futures, do you?
:D
There already are optons on possible interest rate futures as you put it...interest rate caps and floors and interest rate swaps with their imbedded options.
Predictions should be kept to soothsayers. The Fed is no more able to predict the future than anyone else which overall is there are zero future predictions in economics that exceed occassional coincidence probabilities. Plenty of Fed papers on the subject of models reliability...ugggh. It remains and always will be dangerous to make predictions with no scientific basis which then influence the markets adding chaos and actual uncertainty to markets and worse self fulfilling misdirection.
You want to 'believe in the Fed' give it up, religious sentiments have no place in economic theory or markets. The FED should be condemned as the propagandist tools and liars they are serving their politcal bank bosses.
I do my soothsaying with rabbit entrails and cockle shells, myself.
An equally valid approach.
"It seems the Fed knows that it is uncertainty that is making things unstable and expensive for traders."
The people who sit at computers all day swapping bits? Who gives a fuck.
Yes. Those guys.
If everyone is sitting on their hands and eye-balling each other, we would have a scene out of the Old West- all having an itchy trigger finger. The last thing the Fed wants is another shoot-out at the OK Corall. It's bad for publicity.
The less nervous people are, the more liquid the markets, the longer they can extend and pretend. Plus, they get to eventually leave the home-gamer holding the bag of all this but the plan would have a vital component of making everyone soft and cozy. Need that retail money to cover these bad positions.
Yeah. Sunshine and rainbows. That's the ticket.
Good answer. :)
sunshine and rainbows...now where have I heard that before?
Hi Orly.
There is today the Fed Fund Futures contract. At times this can be very heavily traded. The idea that CT could be traded was a bit of a joke. But its not so far fetched as you might think.
Bruce, your parodies of media titles might be putting you in American jeopardy for legal fees as a victim of the media corporations.
Remember the case where the Wall Street Journal had their lawyers make legal threats against some American school outfit that had made a little newspaper for a few children -
'The Small Street Journal.'
Cease and desist! demanded the WSJ. Brand infringement, you know. Little tykes might get 'confused' and not buy a WSJ subscription.
Soon to be followed by the Direxion triple inverse CT ETF.
BTW - Bruce - rendering Yves' parody headline in "Comic Sans" - ouch. That's gotta hurt.
Not farfetched at all call up ICAP and ask how their Economic Derivatives with Goldman and Deutsch Bank project is going if it still is going at all. -There's an application for that in any case.
Let's them say one thing and do another