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The Fed In 2014: A Story Of Unintended Consequences And Goldilocks

Tyler Durden's picture




 

Commentary from Scotiabank's Guy Haselmann

How Did the Story of Goldilocks and the Three Bears End? – She Ran Away

  • Janet Yellen is inheriting a policy framework precisely at the time when the FOMC is in the midst of pivoting policy.  History suggests that financial crises usually arise when central banks pull back from periods of over-accommodation or when Atlas-complex policy-making tries to do too much. 
  • The FOMC has a tricky balance as accommodation needs to be removed quickly enough so that investors do not become too worried about asset bubbles or inflation, but not too quickly so that investors jump well-ahead of the Fed. (Not too hot, but not too cold – just right)
  • The FOMC’s hope is that its decision to initiate ‘the taper’ has been timed appropriately-enough to allow artificially-boosted risk asset valuations to be validated by the fundamentals, thus navigating a soft landing.  The intent is to anchor the front end of the yield curve, so that markets can adjust to the new policy direction in an orderly manner and with muted volatility. 
  • After ‘pedal to the metal’ policy, Bernanke has indicated that the new plan is to ease the foot off the accelerator at a steady rate of decline.  The Fed is swapping asset purchases with forward promises; however the switch may not result in the expected off-set anticipated by officials.  Using the QE “dimmer switch” approach - as Rosengren called it - to recalibrate during the unwind process may not be a strong enough tool to prevent the Fed from losing control of the process.
  • Unintended consequences may have developed from QE policies that are not fully understood.  They may materialize more clearly during the withdrawal process.  Any of a number of obstacles could push the Fed ‘off course’ from the smooth landing that its baseline scenario suggests: 
    • Certainly, expanding the balance sheet by over $3 trillion has had a significant impact on valuations, market functioning, and asset allocation, so those effects could cause some market turbulence as they revert back to normal.
    • Emerging markets, which benefited heavily in the early years of QE, have recently shown some disruptions, such as, slowing economic growth, weakening currencies, and capital outflows.
    • Political and social concerns about income and wealth inequalities have grown due to the use of asset prices as a policy tool.
    • Structural unemployment from long-term joblessness and technological advancement cannot be addressed through easy money.
    • Politics is still polarizing, which in turn creates on-going economic headwinds.
  • Vast uncertainties remain; yet, financial markets appear priced closer to perfection with expectations that sustainable private sector-led growth will propel equity markets ever-higher.
  • “Help” - Goldilocks 
 

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Tue, 01/07/2014 - 10:33 | 4307785 prains
prains's picture

Goldilocks is in the red room of pain right now

Tue, 01/07/2014 - 10:58 | 4307887 negative rates
negative rates's picture

Who wants to race to the cliff?

Tue, 01/07/2014 - 13:16 | 4308441 rubiconsolutions
rubiconsolutions's picture

"Unintended consequences" my ass. This is a planned event. It's been in the planning stages since 1913.

Tue, 01/07/2014 - 10:33 | 4307787 Cognitive Dissonance
Cognitive Dissonance's picture

It's all good dog. Bernanke's Yellen's got my back.

/sarc

Tue, 01/07/2014 - 10:36 | 4307801 yogibear
yogibear's picture

The fed's balance sheet is like it's member banks. Mark to fantasy.

They could hold $10 trillion and show a fration of it. Magic accounting.

Tue, 01/07/2014 - 10:39 | 4307808 Spungo
Spungo's picture

We need to stop pretending this is an accident. Destroying the country really is the fed's goal. You can't tell me that a bunch of people with doctorate degrees in economics didn't know that printing money creates highly distorted markets. Any high school students could see how dangerous this policy was.

Tue, 01/07/2014 - 12:03 | 4308148 KickIce
KickIce's picture

Yep, tired of the "why qe isn't working" articles, especially on ZH.

It's working exactly as planned.

Tue, 01/07/2014 - 10:41 | 4307819 dcj98gst
dcj98gst's picture
  • """"Certainly, expanding the balance sheet by over $3 trillion has had a significant impact on valuations, market functioning, and asset allocation, so those effects could cause some market turbulence as they revert back to normal.""""

There will be no returning to normal.   QE has permanently comprimised our financial structure.  

Tue, 01/07/2014 - 10:47 | 4307843 yogibear
yogibear's picture

"There will be no returning to normal.   QE has permanently comprimised our financial structure." 

They realize it. They will be forced to print ever more. As the US debt approaches $30 trillion it should get interesting.

Tue, 01/07/2014 - 11:20 | 4307979 BuddyEffed
BuddyEffed's picture

If resource constraints are now in play, then the "$3 trillion has had a significant impact on valuations, market functioning, and asset allocation, so those effects could cause some market turbulence as they revert back to normal" will not be returning to normal.

Tue, 01/07/2014 - 11:31 | 4308016 Pairadimes
Pairadimes's picture

No one could have seen this coming. Not even Mr. Yellen.

Tue, 01/07/2014 - 12:04 | 4308153 Gamma735
Gamma735's picture

Look, I get that people do not find Yellen attractive because she is not even remotely handsome.  But let us use proper rhetoric.  Sure it is easy and humoruos to go the ad honimein attack when the Fed Chair fell out of an ugly tree and hit everybranch with her face on the way down.  Well, now it has me wondering how much does she have to pay the ladies to sleep with her or is she like Big Sis and just hires them to be her aides?

Tue, 01/07/2014 - 12:20 | 4308214 Vin
Vin's picture

Why do you think these consequences are unintended?

Tue, 01/07/2014 - 12:56 | 4308353 teolawki
teolawki's picture

Apparently Goldilocks has fallen on hard times. She's recently been spotted selling her body on the corner of Wall and Broad.

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