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The 16 "Dots" That Sent Stocks Reeling
Much has been said about Yellen's Freudian slip involving the "6 month" considerable period language, which as we pointed out earlier, is said to have been the catalyst that sent stocks sharply lower just after 3 pm when it was uttered. However, in reality all this statement suggests is a rate hike some time in mid-2015, half a year after when QE is said to have ended, which if one listens to the market experts, is what is supposed to be priced in (of course, what the experts won't tell you is that the market wants its cake and endless liquidity injections by the Fed too). However, one thing that was far more unexpected and certainly remained unexplained by Yellen, is the curious case of the Fed dots, or the estimations by the individual committee members, of where they see rates at the end of 2016. What was surprising here was the sharp upward jump from 1.75% as of December to 2.25% currently.What is even more inexplicable, is that the Fed hiked its rate forecast even as it lowered its GDP projections for the next two years. Why? Not even Janet Yellen could answer that.
Some further thoughts from SocGen on this latest example of just how clueless the Fed is when it comes to the signals it sends about the future.
Had it not been for the dots, market participants probably would have interpreted today's FOMC statement and Fed Chair Yellen's press conference as sufficiently dovish. Yet, seeing the FOMC median rate forecast for the end of 2016 rise from 1.75% to 2.25% singlehandedly rendered all else irrelevant. Are markets justified in placing so much faith in the dots? After all, they are pre-determined ahead of the meeting, reflect the views of both voting and non-voting members and are not subject to a vote. While we question the erratic movement of the dots that seems disconnected from the FOMC's economic projections, the dots do matter. After all, they reflect an unbiased and current view of what current and future voters see as the appropriate rate setting.
The curious drift of the dots
The big shocker today was not that the Fed abandoned its 6.5% unemployment rate threshold, but that is moved the dots, and not by an insignificant amount. The FOMC's median fed funds rate forecast for the end of 2016 increased from 1.75% to 2.25%, with the end-of-2015 target now at 1% (up from 0.75%). The curious aspect was that this revision looks out of synch with the Committee's economic projections which did not change materially since December. To be precise, participants reduced their average GDP forecast by 0.1% (to 3.1%) for this year and by 0.05% (to 2.75%) for 2016, but revised down their unemployment rate trajectory by about 0.2%. These revisions were accompanied by similar movements in long-term growth and unemployment estimates, suggesting little change in the Fed's assessment of projected slack. As a result, the Committee's inflation forecasts were largely unchanged.
So why the sudden shift in the dots? Even Yellen herself couldn't explain it, replying that she can't speak for “why people write down what they do”. Instead, she tried to downplay the upward drift, saying that it was only modest and underscoring that the FOMC was still projecting a large undershoot relative to the prescribed fed funds rate. For clarification, the dots represent forecasts brought to the meeting by all participants, both voting and non-voting. They are effectively decided ahead of the meeting. As such, Yellen doesn't have any control of the dots and they are not explicitly decided or coordinated by the Committee. In this context, today's move looks genuinely unintentional.
Despite Yellen's best efforts to downplay the dots, markets have taken them to heart and repriced 2016 fed funds futures by 25 basis points. Are they right to do so? Probably. While we question the erratic movement of the dots (see chart 1), they do reflect the latest view of all current and future voters about the appropriate level of the fed funds rate. More importantly, the drift was not caused by one or two outliers but rather by a lot of reshuffling in the middle (see chart 2). Therefore it seems to reflect a real change in the underlying view about the appopriate policy setting.
Forward guidance enters vague territory
In what was largely overshadowed by the dots, the FOMC did take a significant step in overhauling its forward guidance. As expected, the Committee abandoned all economic thresholds and replaced them with qualitative guidance. The timing of the liftoff in the fed funds rate will now depend on “measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments”. That's as vague as it gets. The Committee does provide two additional pieces of information by (1) suggesting that rates will be at zero for “a considerable time after the asset purchase program ends”; and (2) promising that it will keep rates below levels viewed as normal even after employment and inflation are near mandate-consistent levels. In other words, the Fed still promises to undershoot on rates, or overshoot on the amount of stimulus for a long time to come and by a wide margin. This was the message that Yellen tried to push very strongly during the press conference, but convincing the markets may take more effort on her part.
Erratic dot movements + vague guidance = more rate volatility
One of the outcomes of today's shift to qualitative guidance will be increased volatility in rate expectations between FOMC meetings. Market participants clearly base their expectations for the fed funds target on the dots, and forward guidance is supposed to tell them how the dots will change in response to the data. Unfortunately, the new language provides very little information in that regard. And, the erratic and unexplained movement of the dots themselves does not help either. The next set of projections will be published in June, and until then, we are all flying with limited visibility.
In retrospect, perhaps it is a good thing the Fed no longer is providing forward guidance - if anything, it likely would have both bonds and stocks soaring to all time highs at the same time, on two completely contradictory yet parallel indicators about the future state of the economy, in what is becoming a glaring example of just how horrible the Fed is at not only predicting the future, but telegraphing how it plans to get there.
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In the new normal, what does not sent the stocks reeling?
Now that's a fine mess you got us into, Yellie.
This is what happens when a buncha non-practitioner political hack appointees and academics run everything without adult supervision.
It is on auto pilot
manual mode actually makes things worse.
I don't know whether to laugh or cry.
why do you think the pharmacuticals are profiting like there's no tomorrow?
cognitive dissonance among the masses -> massive mental health epidemics -> cure it with pills!
Stocks only "reel" for a day then it's back to Dow Dance Party 2014!
"Dow Dance Party 2014", where the chicks all look like Yellen and the drinks are watered down with kool-aid and are too expensive due to inflation (but nobody wants to admit it).
Can't wait to see what happens when the music ends!
https://www.youtube.com/watch?v=sqgW-2orQQg
I dont want to see Yellen in a Fed Girls Gone Wild video....
Reeling? Even at its lowest of the day, the market barely budged in comparison to the daily green creep. It will reel if the Fed ever starts to unload its balance sheet and especially if it lets interest rates go up. Neither of which are likely in the near term.
Lter what is your guess on this...
Why did Yellen utter "six months"when asked how long until she raises rates once QE "ends"?
First off she stammered and stuttered for 20 seconds to set the stage for her answer. Secondly, when they eliminated the UE threshold she was left with one job today. That was to slam home Zirp 4eva. Zirp well past qe. Well past "growth returning". Well past the inflation happening that they will never acknowledge. So if anything she shoulld have erred on the side of "fucking never" when answering that question. Instead she short hops it and sends yields screeching higher and stawks lower. It all ended up correecting itself for the most part but it was clearly a planned error.
Why?
Purely a guess, but I think her marching orders were to test the waters a bit, send a message that the Fed is going to ease off the throttle but only so long as stocks stay up and rates low (a disguised Zirp 4eva message without having to admit it). They ramped stocks after the small sell off to ease fears and to further fuel the "taper is no big deal" meme. I've come to the tentative conclusion that Zirp will keep the market high so long as they hold it together. There's no yield anywhere else and so long as retirees or soon to be retirees are stuck with the market or products that track the market like indexed annuities, the market will remain atop its castle of sand.
What if its all a bunch of goal seeked BS? What if they are really printing a trillion a month to prop this thing up? Or 2 trillion? And they are just not telling anyone? Its all a mythical fantasy land. On the one hand, they say what they think people want to hear to keep them placated. On the other, they have the printing press to make any market go to any goal seeked number they want it to. How would we know? We can't audit the Fed to find out, so we just have to take their word for it. I'm not buying any of it anymore. FYI, I think you two are some of the best posters on ZH.
Thanks dude. I appreciate that.
Thanks, Scotty. But Fonz is far smarter than me in these matters.
LetThemEatRand - It will reel if the Fed ever starts to unload its balance sheet and especially if it lets interest rates go up. Neither of which are likely in the near term.
The first is extremely unlikey as I think the FED holds all that shit until maturity. The second is going to happen on schedule in early 2015. As others have said it's a confidence game and the FED has to be seen as in control. As I said in an earlier thread, the dollar system can survive a steep stock market drop. Housing Bubble 2.0 popping means we can survive a drastic cut in .gov spending as people's $$$ will go a lot farther with lower housing costs. But what I can't imagine however the system surviving a FED that is publicly regarded as clueless and out of control. I mean WE can know there clueless, but for that to be the general consensus? They have to raise rates even if just for the illusion of control of the bond market and so they can do more than shake their dicks the next time SHTF. If you keep the bar at ZIRP plus or minus some QE that's a really thin window to keep the ponzi going. And reallly athe market pricing in a 2.25 FED rate by the end of 2015 is still pretty sweet territory for them. It wouldn't be 1982... I wonder though on the market levitation. If it's not perpetually ramping up at what point does the tide turn when gains are cashed out and it goes bear? Have we ever even had an extended "flat" market? Seems to me the moment it stop going up it goes down...
My feeling is that this time it is different. They are not just setting us up for another cycle, but something else.
I chat with more than a few that agree with you. Some say Housing Bubble 2.0 is the "final solution" of property serfdom. But it brings to mind a review I read of 'A Brave New World" some time back. In comparing its dystopia to that of 1984 the reviewer found ABNW's far more terrifying in that it was infinitely malleable. One social crack could destroy Eurasia's power structure. The "After Ford" society of a Brave New World consisted of a sea of "happy" inhabitants who would never challenge the system. I find us in a similar place. Why have all the properties in the hands of Wall Street slum lords when you can let the serfs feel greatful for the "bargain" of 30 year debt slavery and property taxation? IMHO the "cycle" is all there ever will be until enough of us evolve to realize we don't need the rule of our fellow man.
"Like the moment when the brakes lock
And you slide towards the big truck
"Oh no!"
"[scream] Daddy, Daddy!"
You stretch the frozen moments with your fear.
And you'll never hear their voices
And you'll never see their faces
You have no recourse to the law anymore."
-Roger Waters
I'm no expert. You know that. But my take is that it is all psychology. The FED really does not have much else. We already know that the concept of rates being some sort of magical lever is BS. So, it is confidence game. A little change-up on BB's game to think that some fresh thinking is in place. Nah. Meet the new boss - same as the old boss. Just spin. We all know the FED is cornered on one hand - and mired in a a financial WWIII on the other. The action is going to move along the lines of balancing domestic and foreign needs in order to maintain the dollar hegemony as long as possible. Just enough here to keep thing from coming unglued, but the emphasis on external effects.
Yellen knows from the get-go what to do and will play it out well I am sure. She had to have been vetted behind the scenes with Navy Seal-like training for people like her... mock interviews, cross examination, all sorts of mind games/word games. She's a pro and everyone ought to think of her as such. Chance of error is slim.
Here is a summary of today from someone I speak to offline who understands this stuff better than I ever will
"Essentially its simple: "IF" unemployment actually improved, then we "SHOULD" see inflation, but "SINCE" unemployment never actually improved and never will, neither will come back strongly enough to force us to raise rates. However, since we cant admit that there isnt shit we did for employment because we never could, we are just going to declare victory at 6.5% and then stop looking at it entirely, but because we can really admit that we are giving up on unemployment, from now on we'll just act like the employment situation might be looking strong enough *just around the corner* to cause inflation to rise above 2% and make us raise rates, which could happen 6 months from
> now, im totally serious you guys...
>
>
>meanwhile, please get the fuck out of bonds because the ECB wants em. Thanks and good night."
"oh and i totally forgot, to see how employments doing we now have lots of dots, so we still TOTALLY care about employment, see here are dots to prove it."
>
Great stuff.
Meanwhile silver has given up most of its 2014 gains. Like we didn't see that coming
Let's face it, revenue growth, jobs, wage gains and overall economic growth have been really slow for years. The real estate bubble just masked it in the years prior to the 2007-2009 downturn. The Fed's goal was and has been to create another bubble to create the appearance that all is well.
No doubt tomorrow 15 Fed guys will be on the tape back tracking and telling the market that they misinterpreted Yellen. What she meant to say was that rates will be at zero until 6 months after hell freezes over. They don't want the market to go down, even 111 points.
The real risk they run is that the market gets so overvalued that it eventually collapses when the recovery never gets as strong as they expect. At that point, their last policy tool fails. All this assumes that China or something else doesn't blow up first and take the globe down before we get there.
The black swan is the one thing that will bring down the market. There are several flying around but it's anyone's guess when and where they land.
And chances are, it's the invisible one that's gonna hit from a direction we least expect.
Exactly Khakuda. Add to that mix the problem of paying the interest on the debt...how do they plan to do that if interest rates go up even to 2%? Does anyone have the slightest idea how that is possible with a debt of 17T and growing? If the answer is no then wtf are they talking about at the Fed? This whole thing has turned into a farce....the Fed pretending that all is well in the hope that the markets will keep going up when everyone knows how fucked up the economy is....so who are they trying to kid? This is like some Japanese Kabuki opera where elaborate masks are worn as symbols to represent characters but everyone can recognise the actor behind the paint...Yellen is saying stuff for ?? yet we can all see that this is just for show...her lips are moving but even she doesn't believe what is coming out of her mouth. Is this some kind of tragicomedy that has a pre-ordained conclusion and all the actors (market/Fed/US gov) are just playing along because they can't think of anything else to do or because it would be too painful to tell the truth? Hey guys, with this fake it and hope for the best approach the economy is totally fucked and we are not going to be able to fix this thing. Unless serious steps are taken to reduce spending very significantly and to get multinationals to pay their share of taxes so small business and individuals can get a break, it is just a slow downward spiral from here on in...end of the US empire. Get used to it....yeah, I guess that would be kind of hard to swallow.
The FED sees a Deflationary environment and that means the upward shift in expectations points to a fear of Stagflation - Higher Interest Rates NOT coupled with higher economic activity.
"C'mon, Jeffrey, SMILE for the effin' camera, will ya' just this once? I SAID SMILE..."
Uh, oh.
Now that they are ignoring unemployment they are going to raise rates to pop the bubble a-la Alan Greedspun 2004-2007.
How else can the banksters clear those 401K/IRA/Pension chips off the table again?
Bubble 2.0, Bailouts 2.0; it is what Wall Street wants and needs.
Exc. comment. They make alot of money when bubbles grow, but they make a sh*tton of money when they pop.
Cuz raising rates gonna bury Emerging and lo and behold, that's your neck of the woods, Vlad old buddy. And they will keep twisting till the other EMs cry Uncle, and we'll send em some nice tanks or shite like that, so they can happily repress there own peeps.
Cynical you say? Hah!
Disclaimer : I give neither implicit or explicit consent for any Federal Agency, named or unnamed, nor any of their global "partners", to surveil my person or any of my papers or affects, materially or digitally, without a warrant signed by a judge duly obtained in a court of law.
An article posted here last week or the week before nailed it:
The most important thing to the PTB is the dollar remaining the reserve currency. Interest rates, economic growth, prices, stock market all take a back seat to that goal.
That is why you see forecast higher fed rates with lower economic growth.
Neither 1.75% nor 2% for ffr will ever happen and they will never end QE either.
Mr. Yellen is desperate to save the dollar from collapse. Only explanation needed.
Agreed. The USD should have received much more support over the past 3 weeks from the Russia/Ukraine/Crimea mess but didn't (as prior events from 2008 through 2010 produced a rush to the USD). In fact, it looked liked it was starting to weaken. Really no different than the other emerging markets resorting to desparate measures to save their currencies (e.g., Turkey raising rates to 10+%). Just a little different in the US as simply making the threat will get the job done.
Let's not forget that Russia probably planned well ahead and has already implemented a strategy to reduce if not eliminate US holdings and that the Belgium Bulge (now $300 billion of US Treasuries) may indicate the world is losing its appetite for US assets. Could it be that China is simply divesting US Treasuries directly in exchange for real assets with no need to convert them into USDs? Is this where these treasuries are ending up? Combine these events with the ever popular Myra coming to a theater near you and that the US's clout/influence over the Ukraine/Crimea matter has basically been reduced to nothing more than name calling (with almost no international support received) and what you have is the first stage of a currency crisis setting in.
And BTW, is it any wonder that the economy is in such a mess? I mean, the Fed can't even effectively communicate in a written or spoken format as after I read the language from the Fed's statement, I was confused as ever. So the sun is hot but maybe not. The sun will rise in the morning but then again, maybe not. The economy is strong enough to absorb the taper but we're concerned over this, that, and the other thing. WTF!
This is what controls the stock market, the bond market, and interest rates? Fucking dots. I guess it wouldn't much surprise me if the dots are chosen by tarot cards.
Fuck this shit.
Hey, Tarot cards have more validity behind them than Keynesianism!
That's fucking it,I'm buyin the dip.
Contrary Indicator?
Is it just me or does she sound like she hasn't a fucking clue what she is talking about?
At least Bernanke sounded like he did...
Why her slurred speech?
Drunk or scared shitless?
This is fucking bullshit.
My goodness, Yellin really is Bawney Fwanks husband...
How are we supposed to BTFATH when prices are going down? We need moar QE!
Fucking dots. Are you guys serious?
Someones going to blink first, and who ever it is is going to get out first. The rest can stumble over each other to get though the door. Someone might have even blinked already from the looks of that weekly bond selling prior to the FED posted by ZH.
TWO fucking TWO FIVE percent is a cause for alarm???? Really??? We are so screwed.
"What is even more inexplicable, is that the Fed hiked its rate forecast even as it lowered its GDP projections for the next two years." Oh I don't know. Perhaps after a bit of deflation there would be a tendency towards Stagflation?
Even worse is maintaining the base rates around %2 which is probably not a rate that allows healthy economic activity. Artificially suppressing the rate (while it may serve the purpose of "managing" national debt) doesn't allow for proper pricing of risk (the rate should be higher in absolute terms) for all the other rates based on the base rate. The latter mispricing of risk necessary slows business activity which depends on lending at the proper risky rate to be viable.
No amount of printing money to underpin bank and corporate balance sheets inflating the stock market can undo the constraining effect of mispriced risk on credit and money markets.
So there.
Currently unemployment cannot be fixed with monetary policy. There has to be changes to the means of production, what is produced and employers taking social responsibility for people they unemploy. That is to say an almost impossible world change.
One or two or three generations of people say over 35 have been obsolesced for the rest of their lives into non-productive existence. And the older generation of the three has been stripped of the part of their retirement which was the equity in their homes.
Splendid just splendid. Monetary policy seems more like it is intended to impact what it is structured to have no relationship to - an actual view of an economy where there is production by people and machines. It is a monetary policy that avoids the internals of production such as both people and machines consume fuel and energy and produce things of use and of waste. There is an economy that has an impact on people and society and whether they function or work or not, which is a good deal more real than money or monetary policy.
Therefore monetary policy is just propoganda for the moneyed to confuse the rest of us and continue to steal our money and work. Of course there is a good stain of positivist statistical distortion and lies which provide the superstructure for the disinformation.
In terms of the world that exists outside of money itself (everything else) monetary policy is sterile and useless. In terms of the future monetary policy neither controls or predicts the future. Sometimes it functions as self fulfilling prophecy distorting what might have happened at other times it attributes itself as cause where in fact there was no effect. Based on the fictional aspects of statistics it is based on nothing economic. Monetary policy as it is practiced is a huge dry hump.
TO move forward the FED should be disbanded being a veiled monopoly. Perhaps then risk rates would be comensurate with the risk they finance. Perhaps then banks could become competitive and not a few monopolies.
They buy assets from money you going to make (you productive son of a gun) and store them under a nameplate called us U.S. it spends the money into the treasury before the naughty banker makes a stupid mortgage loan and wreck our us's system by really putting too much money after too few goods. Eventually we will have to raise rates to offset the stimulus of removing taper which will have to be explained away with dots and/or forward guidance and a little FEMALE CHARM. To again become the driver of global growth and LONG LIVE PAX AMERICANA
Its fucking adjust the bands week and a Belgian fair and the weather broke between now and '016 and you like me you really like me speeches to the huddled masses
Its really a laugh that the FED after 2007 has much more control over the process than any give them credit? Spending money into the treasury is much more controlled and is as safe as risk free? Demographics helps this observer sleep knowing the Fed and I love CREDIT.