"Fed Credibility In Tatters", Credit Agricole Laments: "Market In State Of Shock"
The "market is in a state of shock" after the Fed's decision to postpone taper, noted Credit Agricole's David Keeble adding that "Fed credibility and its communication strategy are in tatters." This, as others have noted, will make it many times more difficult to manipulate yields lower in the future as the "Fed is moving to a new way of looking at asset purchases."
As we explained in detail 15 months ago, Keeble notes the Fed appears to have clearly signaled that the degree of accomodation is not linked to size of the Fed balance sheet, but that the flow of Fed buying is "very important." So, it's the flow, not the stock.
Keeble does warn that rates could rise once again in the next several weeks if Congress reaches resolution to avoid government shutdown - which could perhaps be the post-fiscal-year-end signal for another Taper-tantrum.
One way of visualizing what this means is to think of a shark which has to be constantly in motion in order to survive. Well, the allegory of Jaws can be applied to liquidity addicted capital markets. Translated simply, it means that it is irrelevant if the Fed's balance sheet is $1 million, $1 trillion or $1,000 quadrillion. A primacy of flow over stock means that UNLESS THE FED IS ACTIVELY ENGAGING IN MONETIZATION AT EVERY GIVEN MOMENT, THE IMPACT FROM EASING DIMINISHES PROGRESSIVELY, ULTIMATELY APPROACHING ZERO AND SUBSEQUENTLY BECOMING NEGATIVE!
All caps aside, what this means is simple: if it is indeed flow that matters (and it is), then Fed intervention can never stop, period. If the stock of a central banks' assets is irrelevant, the Fed can have $1 on the left side of the balance sheet or $1 quadrillion: it does not matter - if the market expects the Fed to stop buying assets tomorrow, then the crash is as good as here. That has precisely been the biggest flaw with the Fed-accepted stock model, per which Bernanke can buy up a few trillion in MBS and the stock market will be flat as a frozen lake. Alas, this is increasingly becoming obvious is not the case. Hence flow.
For monetary theory purists this is equivalent to Martin Luther walking up to the front door of the Marriner Eccles building and nailing his 95 theses: we have now entered the era of the monetary reformation, which incidentally as more and more classical economists follow suit, will throw all of Keynesian and neo-classical economics into a tailspin where virtually every core assumption will have to be reevaluated.
Congratulations economists: in their pursuit of another record year of bonuses at any cost, Goldman just sacrificed your precious voodoo. Because where Goldman goes, everyone else promptly follows.
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