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Did Jon Hilsenrath Just 'Leak' The Fed's "Earlier-Than-Expected, Surprise" Rate-Hike Plan

Tyler Durden's picture




 

Chicago Fed's Charlie Evans called the drop in rates at the longer-end of the Treasury yield curve "extraordinary," falling just short of screaming "sell, sell, sell bonds" and threw wrench in the Fed's policy path by noting "raising rates at the wrong time would be catastrophic." So it is noteworthy that damage control appears to have been engaged this morning by no lesser Fed mouthpiece than Wall Street Journal's Jon Hilsenrath. Reminding the public of Bill Dudley's fears, when he argued the Fed had the wrong reaction to lower long rates in the 2000s, a mistake that might have contributed to the housing boom that ended disastrously; when instead the Fed should push rates higher sooner or more aggressively than planned.

 

Via The Wall Street Journal's Jon Hilsenrath,

If, on the other hand, lower long-term rates are a reflection of investors pouring money into U.S. dollar assets, flows that could spark a U.S. asset price boom, it might prompt the Fed to push rates higher sooner or more aggressively than planned.

 

The latter interpretation is less conventional, but it is one that New York Fed President William Dudley made at length in a speech in December. He argued the Fed had the wrong reaction to lower long rates in the 2000s, a mistake that might have contributed to the housing boom that ended disastrously.

 

Here is a key passage:

 

During the 2004-07 period, the (Fed) tightened monetary policy nearly continuously, raising the federal funds rate from 1 percent to 5.25 percent in 17 steps. However, during this period, 10-year Treasury note yields did not rise much, credit spreads generally narrowed and U.S. equity price indices moved higher. Moreover, the availability of mortgage credit eased, rather than tightened. As a result, financial market conditions did not tighten. As a result, financial conditions remained quite loose, despite the large increase in the federal funds rate. With the benefit of hindsight, it seems that either monetary policy should have been tightened more aggressively or macroprudential measures should have been implemented in order to tighten credit conditions in the overheated housing sector.

 

Mr. Dudley’s conclusion was that the pace of the Fed’s short-term interest rate moves this time around ought to be dictated in part by whether the rest of the financial system is moving with or against the Fed’s intentions when it decides it ought to start restraining credit creation:

 

When lift-off occurs, the pace of monetary policy normalization will depend, in part, on how financial market conditions react to the initial and subsequent tightening moves. If the reaction is relatively large—think of the response of financial market conditions during the so-called “taper tantrum” during the spring and summer of 2013—then this would likely prompt a slower and more cautious approach. In contrast, if the reaction were relatively small or even in the wrong direction, with financial market conditions easing—think of the response of long-term bond yields and the equity market as the asset purchase program was gradually phased out over the past year—then this would imply a more aggressive approach.

 

...a stronger dollar and rising – albeit volatile – stock prices suggest the U.S. is attracting foreign capital which could charge up U.S. financial conditions and prompt an early or more aggressive Fed move.

 

The Fed’s next policy meeting is three weeks away. It is clear officials will spend a considerable time debating the correct response to a perplexing lurch down in long-term rates.

*  *  *

Strawman? Or Hint?

It seems Dudley's view that stocks rising and bond yields falling post-QE3 is "wrong" and requires a more aggressive stance is extremely noteworthy.

 

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Thu, 01/08/2015 - 10:49 | 5636742 Maplehood
Maplehood's picture

A rate hike will only strengthen the dollar and thus continue to crush emerging markets.  EEM is sitting on 12 year support.  A break below $36 and we're gonna see it get "crude oiled."

http://www.goldsqueeze.com/analysis/emerging-markets-dangerously-close-t...

Thu, 01/08/2015 - 11:12 | 5636886 disabledvet
disabledvet's picture

We don't know this...

 

YET.

 

What we do know is that the USA is the largest feedstock producer in the world. 

 

That says to me "if you want your product refined send it to the USA."

 

Which says to me IN THEORY refined product...of ANYTHING...could become very "cheap"... relatively speaking.

 

So let's start with say...aluminum....

Thu, 01/08/2015 - 13:38 | 5637687 MalteseFalcon
MalteseFalcon's picture

"During the 2004-07 period, the (Fed) tightened monetary policy nearly continuously, raising the federal funds rate from 1 percent to 5.25 percent in 17 steps. […] With the benefit of hindsight, it seems that either monetary policy should have been tightened more aggressively or macroprudential measures should have been implemented in order to tighten credit conditions in the overheated housing sector."

Actually the rate shouldn't have been at 1% to begin with.  A series of FED errors led to the 1% rate.

But cutting to the chase, it isn't 2007 anymore.  Many more mistakes have been made and interest rates cannot be raised without destroying the stock market and bankrupting the government.

So interest rates are not going up.

Thu, 01/08/2015 - 11:01 | 5636823 NotApplicable
NotApplicable's picture

1) Why does this douchebag continue to spam his blog on ZH?

Thu, 01/08/2015 - 11:08 | 5636869 SAT 800
SAT 800's picture

Because; page clicks ?

Thu, 01/08/2015 - 11:21 | 5636923 El Oregonian
El Oregonian's picture

2). A Parasite trying to benefit from a good host.

Thu, 01/08/2015 - 13:04 | 5637470 RaceToTheBottom
RaceToTheBottom's picture

Remember, the stock market is the economy....

Thu, 01/08/2015 - 14:26 | 5638013 Consuelo
Consuelo's picture

And double-remember that it is a Political Economy as well...

Thu, 01/08/2015 - 13:49 | 5637763 long-shorty
long-shorty's picture

because if you want to reach an audience of 9/11 "truthers" and people who believe the Charlie Hebdo attack was a "false flag" or Mossad affair, ZH is the sort of place where you can reach that audience. and for free.

in other words...

the douchey blog promotion will continue until the paranoid comments improve.

Thu, 01/08/2015 - 13:59 | 5637829 marathonman
marathonman's picture

When you say it like that it stings a bit.

Thu, 01/08/2015 - 10:46 | 5636755 Glass Seagull
Glass Seagull's picture

 

 

More mfg'd Fed implied policy vol. 

 

Just continuing to try and manage policy gamma by boosting policy vol and extending policy tenor. 

Thu, 01/08/2015 - 11:15 | 5636901 Alea Iactaest
Alea Iactaest's picture

An historical study of US recessions is a study of credit contraction. Specifically, recessions are engineered when favorable to the people issuing credit.

As always: qui bono?

Banks are loaded with cash, foreigners are more in hock to the Fed than ever.

When you wonder whether a recession will be good or bad you need to first imagine you are sitting in a position where you control the levers, not where you currently are sitting.

Also, remember the people at the Fed are NOT stupid. They just see the world differently than you do. Also remember who owns the Fed.

Draw your own conclusions.

Thu, 01/08/2015 - 10:47 | 5636760 Bernoulli
Bernoulli's picture

Is this message part of the plan to confuse everybody?

Thu, 01/08/2015 - 10:55 | 5636777 Pool Shark
Pool Shark's picture

 

 

There is no confusion:

The Fed can't raise rates, so it won't.

Don't listen to what they say, watch what they do...

Want to see the future of US interest rates? Here's your roadmap:

http://static.cdn-seekingalpha.com/uploads/2013/4/8/saupload_japan-government-bond-yield_thumb1.png

 

 

Thu, 01/08/2015 - 10:57 | 5636806 MaxMax
MaxMax's picture

Right.  They have been talking about raising rates at some point in the future for how many years?

And remember housing is not in a bubble, QE1, green shoots, QE2, QE-Twist,,,?  Who really believes them?

My guess is rates go to zero and some go negative.

Thu, 01/08/2015 - 11:07 | 5636858 Bernoulli
Bernoulli's picture

They still need to come up with a lot of different messages so that at the end they can say it was not their fault.

So while sending out tons of confusing messages ("patience" WTF!!!!), they hope for something (Europe? Japan? Terrorists? ECB? ANYTHING?!? PLEASE!?!) to cause a global crash, so they don't have to act on the interest rate front.

Thu, 01/08/2015 - 10:54 | 5636795 NoDebt
NoDebt's picture

Did it work?  Then it was part of the plan.

Thu, 01/08/2015 - 11:00 | 5636827 NotApplicable
NotApplicable's picture

Isn't disinfo wonderful?

Can't have everybody on one side of the boat, after all.

Thu, 01/08/2015 - 10:49 | 5636764 ukspreads
ukspreads's picture

Someone tell the DJI - 160 point gap open and then some...

What utter fucking garbage !

CUNTS !

Thu, 01/08/2015 - 10:50 | 5636767 unplugged
unplugged's picture

the lies will continue until morale improves

Thu, 01/08/2015 - 12:55 | 5637416 Wait What
Wait What's picture

how could you not have seen this coming? i mean, 5% drawdown, spike to new highs. it happens every time. and every times stocks are stick saved by Fed jawboning. where have you been for the lst 6 yrs?

make some money, buy some phyz, that's what Wait What is doing

Thu, 01/08/2015 - 10:50 | 5636765 unplugged
unplugged's picture

leaks of lies - deceptions - propaganda - damn lies - all of it - everything these bastards spew from their pie holes - lies - lies - lies....

Thu, 01/08/2015 - 10:52 | 5636773 Dr. Engali
Dr. Engali's picture

Did it ever occur to these assholes that the long end of the curve didn't follow suit the last time they tried to raise rates because what was left of the bastardized markest already knew we were headed for disaster and all it took to seal the deal was for the fed to invert the curve? People who could fog a mirror could get multiple houses for no money down for fuck's sake. The same thing will happen IF they try to raise rates again. These people are idiots. 

Thu, 01/08/2015 - 10:56 | 5636805 NoDebt
NoDebt's picture

So you're saying they/re NOT going to make the same mistake a third time? 

Thu, 01/08/2015 - 11:15 | 5636826 Dr. Engali
Dr. Engali's picture

I'm saying they will have egg on their face just in time for me to get a sandwich ;->

Thu, 01/08/2015 - 11:15 | 5636910 Alea Iactaest
Alea Iactaest's picture

Doc, they are NOT idiots. Their goals, however, are not necessarily the same as yours.

Thu, 01/08/2015 - 12:48 | 5637367 Wait What
Wait What's picture

they are idiots, that's why you're seeing 'dissent' on both sides of the inflation spectrum of the FOMC. they've reached a fork in the road and don't know whether to go right or left.

they thought they could manage monetary conditions after every iteration of QE when in reality, they can't. they know 'valuations are stretched' beyond historical norms but can't do anything abt it without destroying 6 years of their 'hard work.'

you give them to much credit for omnipotence.

listen to 'the maestro' himself tell you:

http://www.bloomberg.com/video/greenspan-we-should-tighten-at-some-point...

Thu, 01/08/2015 - 13:01 | 5637452 malek
malek's picture

These are just CYA actions, with placebos

Thu, 01/08/2015 - 11:04 | 5636846 NotApplicable
NotApplicable's picture

Occur? Idiots?

Are you forgetting that they do this shit on purpose? As long as they survive the day intact, that's all that really matters to them. Which they do by managing "expectations," not rates.

Doublethink works very well in Stupidtown.

Thu, 01/08/2015 - 10:51 | 5636775 ukspreads
ukspreads's picture

And the best of it is that since QE stopped (Allegedly) the market has had it's best run for donkey's years.............

Thu, 01/08/2015 - 11:17 | 5636917 Alea Iactaest
Alea Iactaest's picture

QE has not stopped, not by a long shot. It has ostensibly been stopped in the US, however that does not appear to be true either.

Thu, 01/08/2015 - 10:50 | 5636778 Stoploss
Thu, 01/08/2015 - 10:54 | 5636787 khakuda
khakuda's picture

Great chart.  Oh crap, reality.

Thu, 01/08/2015 - 12:08 | 5637164 Real Estate Geek
Real Estate Geek's picture

Reality, except that it probably includes government in the denominator.

Thu, 01/08/2015 - 11:07 | 5636863 hotrod
hotrod's picture

and that is if GDP is what they say it is.  I would submit that a trillion or 2 is GONE from GDP that is why they did all those historical revisions to GDP last summer to try and prop it up.  I think England and a few other countries revised their inputs to GDP also. 

Thu, 01/08/2015 - 10:52 | 5636780 Lax Accounting
Lax Accounting's picture

How would the fed raise the long end of the curve? The only way would be to dump all of the long term bonds they hold.

Thu, 01/08/2015 - 11:07 | 5636781 khakuda
khakuda's picture

Yeah, we are going to aggresively raise rates 1 basis point per Fed meeting.  By the end of the year, they will be at 6 basis points.  We'll show you we mean business.

Thu, 01/08/2015 - 10:53 | 5636783 noben
noben's picture

This Hilsenrath fellow, what street does he live on, and what church does he go to?

Thu, 01/08/2015 - 11:01 | 5636822 NoDebt
NoDebt's picture

Church?  Think about it.

Thu, 01/08/2015 - 10:53 | 5636788 astoriajoe
astoriajoe's picture

Everyone, on three.

one,

Two

Three,

YOU CAN'T TAPER A PONZI!

Thu, 01/08/2015 - 11:20 | 5636937 Alea Iactaest
Alea Iactaest's picture

Total agreement, over the long term, but squiggles in the short term help shake change out of people's pockets.

A tight (temporary) squeeze will drive asset prices to the floor. Anyone holding cash will have their pick of the biggest Blue Light Special ever.

Then Uncle Sugar can turn on the spigots full blast once the people have been duly pauperized and they're begging for "relief".

Careful what you wish for...

Thu, 01/08/2015 - 14:36 | 5638072 Consuelo
Consuelo's picture

All true, but there has to be a 'number' in mind, or at the very least a set of conditions so as to not let an 'opportunity' turn into a catastrophic thermal run-away event/s.   No...?

 

 

Thu, 01/08/2015 - 13:05 | 5637476 malek
malek's picture

How about tapering the second derivative of a Ponzi? (I.e. "we're gonna slow the growth of the increase")

Because that's what they seem to be doing currently...

Thu, 01/08/2015 - 10:54 | 5636789 yogibear
yogibear's picture

This is not your father's Fed.

It's a Fed desperate to keep the whole Ponzi afloat. PhD's trying everything they can.

Trying to buy more time in hopes of things turining around.

They made a grave mistake going along with infinite debt and credit expansion in a finite world.

Thu, 01/08/2015 - 10:54 | 5636790 Hamm Jamm
Hamm Jamm's picture

IGOR .....    yes master...   leak the fake plan ....    Yes MASTER !!

 

IGOR: the fowl despicable slithery scaley underworld bottom dwelling slave of the bank

Thu, 01/08/2015 - 14:38 | 5638086 Consuelo
Consuelo's picture

Hey - that's 'Eye-Gor' to you buddy...

Thu, 01/08/2015 - 11:00 | 5636818 SheepDog-One
SheepDog-One's picture

Aaaand now the bad cop takes the podium.

Thu, 01/08/2015 - 11:04 | 5636839 ifishivote
ifishivote's picture

Please stop posting stories about the Fed raising rates.. ITS NEVER GOING TO HAPPEN!!!!

Thu, 01/08/2015 - 12:34 | 5637293 eclectic syncretist
eclectic syncretist's picture

If they are saying they will raise interest rates, it will happen, whether you believe it or not. Why they would do it will be an interesting question for the armchair quarterbacks, I can only surmise they hope to preserve what little credibility they still have.  When asked a year ago many would have never believed that QE would be gone by now, but it is.  The current market volatility portends something ominous dead ahead.

Thu, 01/08/2015 - 13:46 | 5637740 MalteseFalcon
MalteseFalcon's picture

"When asked a year ago many would have never believed that QE would be gone by now"

I believed QE would end, because I knew Japan or Europe or China would pick up the ball and print.  Voila.

There is no analog for increasing rates.  Crashing the stock market crash and bankrupting the government are not strong wartime strategies.

Cutting oil prices is.

Thu, 01/08/2015 - 11:06 | 5636845 Billy Shears
Billy Shears's picture

BS! Just trying to shore up what little credibility the FED has left now that they're shooting blanks

Thu, 01/08/2015 - 11:13 | 5636900 wagthetails
wagthetails's picture

They want full control over the entire yield curve? so GD dangerous.  buying 40% of 10 year float isnt' enough.  They are going full financial dictator.  the poor people just dont know what is good for them.   the long end is correct in that there is a massive amount of weakness at some point in the future.  simply moving that long rates up doesn't change that fact.  having complete control over the yield curve, simply gets you complete control over the yield curve...not true economy.  unless you can control the spending desires and habits of every citizen it just won't work. (i'm sure google is working on a solution for this)  Set the long rate at whatever you want but other markets will develop.  they'll be a black market for everything:  debt, currency, work, commerce.  

Thu, 01/08/2015 - 11:20 | 5636929 Eagle Keeper
Eagle Keeper's picture

I started to write some witty comment then erased it.

Fuck them all. Same thing, different day.....

Thu, 01/08/2015 - 11:20 | 5636939 Herdee
Herdee's picture

Put up interest rates and you demolish the stock market.And pay added interest on over 18 trillion deficit run up by war.Exactly where will the federal government get the added revenue?From low paying jobs at minimum wage?Get real,it's an illusion being created.They have the Japan disease now.

Thu, 01/08/2015 - 11:22 | 5636941 bnbdnb
bnbdnb's picture

"raising rates at the wrong time would be catastrophic."

The economy is so strong that a small .25% rate hike would destroy it.

Thu, 01/08/2015 - 11:58 | 5637106 matagorda
matagorda's picture

40 years of feeding baby huey carry trade with ever more short end liquidity has resulted in the 600 lb corpse that is the financialized US economy.  Solution, as in eating gilbert grape -- burn the mutha down!

Thu, 01/08/2015 - 12:39 | 5637323 Ewtman
Ewtman's picture

The The Creature from Jekyll Island's hundred year reign will come to an end shortly.

 

http://www.globaldeflationnews.com/the-creature-from-jekyll-island-the-e...

Thu, 01/08/2015 - 12:52 | 5637389 Random_Robert
Random_Robert's picture

The Fed always learns/eventually knows what needs to be done-

Only they always learn/know it in hindsight-  just like everyone else.

The FED does not/ can not  time markets any better than anyone else.

 

Those of you who think that market timing can be subjugated by employing market manipulative practices to "control"  the pace and duration of market trends fail to see that markets themselves are dynastic; meaning that markets are being born today that the Fed does not even know about.

So, the struggle for control of anything societal in nature (markets, communities, populations, cultures)  is always a "Chase, and destroy when caught"  exercise...

This "new normal"  that everyone thinks is "new"  is actually just a modern replay of the emergence of power structures that are actually very old...  And every time these structures have emerged in the past, they have failed, as they will again this time.

The Chase is over-  The catch is made. It's destroy time.

These power structures always arise first with platitude:  "I/We  will give you what you want, just let us work our magic"...  followed by false distinction: "I/We are different-  we are special, we are deserving"  followed by propaganda: "Ignore what you see with your eyes and hear with your ears-  trust us to see and hear FOR YOU"...  followed by consternation: "I/We  have delivered what we promised, and you have done nothing with it - The responsibility for failure always falls to the electorate, not the elected...",  followed by denigration:  "You are too stupid to live without me/us - So I/we must take full responsibility for your well-being, therefore elections have become superfluous and unnecessary", followed by sheparding: "There are too many of you for me/us to take care of - your numbers have to decrease"...  Followed by (in no uncertain order): famine, fascist oppression, or the worst/last ditch case: war.

 

 

 

Thu, 01/08/2015 - 13:04 | 5637472 Madcow
Madcow's picture

Translation:

"We're going to turn the economy OFF in a month or two.  It things get better as a result, we'll leave the switch OFF.  If somehow, for some unexpected and unforeseeable reason, things get worse not better as a result of turning the economy OFF, we will flip the switch and turn the economy back ON"

Genius. Where can I sign up to get a PHD in economics?

Thu, 01/08/2015 - 13:12 | 5637517 tommylicious
tommylicious's picture

how funny will it be if we end up cheering Janet once she puts the pear of anguish to asset markets

Thu, 01/08/2015 - 13:38 | 5637672 tommylicious
tommylicious's picture

good article.  in other words, fed may preemptively seek to sterilize external capital flows?

Thu, 01/08/2015 - 14:31 | 5638046 enloe creek
enloe creek's picture

I am clueless, they say rates will go up slightly ok, that means a corresponding drop in bond values, that would create a $ weakness possibly. that is desired effect.  they are worried that the $ is overvalued now.  

Thu, 01/08/2015 - 14:53 | 5638166 Clesthenes
Clesthenes's picture

“raising rates at the wrong time would be catastrophic.”

We certainly don’t need to take him seriously.

It’s too late: raising rates AT ANY TIME will be catastrophic; at least.

The last time the Federal Reserve held rates artificially low (a 2% discount rate for two years, 2004-7), it precipitated an unprecedented boom in real estate prices.

For the last 6 (going on 7) years, the FR has held the discount rate at 0.75%; and RE prices have risen only moderately and not nearly as broadly as the prior boom.

When the FR raised rates from 2% to 5.25% (2006-7), the action precipitated an unprecedented crisis – on a world-wide stage.

Now, what will happen when rates are raised again… as they inexorably must?

Let your imagination run wild… on a world-wide stage.  See, Bad News… and Anatomy of a General Plunder, part ii.

Thu, 01/08/2015 - 17:20 | 5638809 cart00ner
cart00ner's picture

Let me see if I understand the situation correctly;

 

A company borrows $1 million at 5% initially and pays $50k interest.

Rates go down to 2.5% and the bank says ‘hey for that $50k you can now have twice as much’

The greedy company says ‘F-yeah!’

Rates drop again and so on…

Fed raises rates and the bank calls the company and says ‘Pack your bags we own you M-fuckers!’

 

 

Is that about it?

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