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A Reminder Of The Fed's Interest Rate Conundrum
From Michael Lebowitz of 720Global
The Fed's Interest Rate Policy Conundrum
With the Federal Reserve (Fed) conducting their regularly scheduled FOMC meeting this Wednesday, we point out an interesting contrast between the current posture of the Fed which suggests they are leaning toward Fed Funds rate hikes versus prior post-crisis policy.
When the Fed lowered Federal Funds rate to zero percent in December 2008, various forms of Quantitative Easing (QE) were used to further ease monetary policy, decrease longer-term interest rates and stimulate the economy. Since 2008 there have been three separate instances of QE. Additionally, an action termed “Operation Twist” allowed the Fed to sell shorter term bonds they recently bought and use the proceeds to purchase longer term bonds. Economic activity reversed course with these actions.
The first round of QE started in 2008 concurrent with the move to a zero interest rate policy to combat deep economic contraction and a severe banking crisis. The following two doses of QE and Operation Twist were done in efforts to reverse slowing economic data. Except for on-going asset purchases aimed at maintaining the current level of the Fed’s balance sheet, QE3, the latest occurrence of QE, ended last October and was quickly followed by Fed discussions of potential interest rate increases. Based on various speeches by Federal Reserve Chairwoman Janet Yellen and her colleagues, many market participants believe the Fed could raise the Federal Funds rate as early as the June 17th meeting.
Talk of raising interest rates introduces a new Fed conundrum. Over the last few months, Federal Reserve Board members have maintained a less dovish tone which implies the eventuality of rate hikes despite economic data which has been slowing rapidly. The singular exception to weaker data has been the employment figures which have continued to improve. Based upon a composite of economic data readings, the prior policy stance would have called for more QE (or rate decreases if not zero bound) given the weak levels of economic data as well as the trends.
As we illustrate below, a case can be made that, excluding 2008, the economy is weaker now than prior to the announcement of the previous QE actions and Operation Twist. Further confounding the Fed stance is inflation, which as measured by CPI is running lower than at any time since 2009. Additionally the strong dollar and global deflationary trends point to lower inflation and possibly deflation in the coming months.
Graph 1, below aggregates eight key economic statistics and compares the most recent three month period to the average of the prior six months. This gauges the relative strength of data trends over the last nine months. Graph 2, the Bloomberg Economic Surprise Index, measures current economic data releases, like our trend model, but instead compares them to Wall Street economists’ expectations and not prior data. The combination of graphs 1 and 2 confirm that economic data has slowed both sharply and unexpectedly. Finally, graph 3 charts CPI as compared to the Fed’s self-mandated 2% inflation target.
The Fed’s current language and posture are significant departures from monetary policy since the financial crisis. The soaring dollar and declining bond yields seem to be pricing in this new dynamic. Equities and other risk markets on the other hand do not reflect any noticeable concern. If Fed policy continues to shift toward rate hikes we expect market volatility to dramatically increase and equity markets and other risk assets to experience meaningful corrections. Current equity market valuations are at or near record extremes by several measures and well above fair value by most. Over the last 6 years, equity prices have been driven not by fundamental economic data but on an explicit promise and variety of actions from the Fed to support asset prices. To the extent this promise truly is coming to an end in its current form, it likely implies radical changes for asset prices and market behavior and warrants caution.
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At this point, they have to raise rates before they can lower them..., I guess.
A giant meteor impact would solve everything for them now.
The 10-Year Treasury will see 1% before it sees 3%...
Pop Quiz. Spot the trend:
http://www.yebu.com/wp-content/uploads/2012/08/10-year-Treasury-yield.png
[HINT: "We are all Japan now..."]
Fuck it!! The FED is NOT going to do shit. They will replace "patient" with some other bullshit word that means exactly the same damn thing. The phuckers at the FED cant raise rates or it will tank the stock market and they, the FED, need to keep the illusion that the economy is great alive. Rally on motherfuckers, rally on!!
Given the fed's statement, I'll bet whoever down-arrow'd me feels pretty stoopid right now...
No another option is to take rates negative. But if they do this it's an admittance they've lost control completely. Don't think they've ruled out plain old stealing. We already have to give them hundreds of billions every year to cover the interest payments, and that's at historically low rates. Just think what a doubling of the rate, even as low as it would be, would do to the budget.
Their behavior makes this sound reasonable.
http://redefininggod.com/nwo-schedule-of-implementation/
Looks like an 8th degree polynomial of some kind .
The 2% inflation target graph is an identical inverse of the DXY.
That indicates the deflation is aggravated by the hoarding of dollars.
If that is the case, then we are much further along than is believed at this time. (Dollars are and have been drying up)
Dollar shortage coming. Don't get caught without any.
Oh yea of little QE (counterfeiting) faith.
"The Fed's Interest Rate Policy Conundrum"
Assume something large is going to happen around June. Inflation and growth forecasts will not change before then. They will probably deteriorate more.
A rate increase of 0.25 bp on the short end will be meaningless, particularly following seven years of rate declines. They should just show that they are actually capable of increasing rates.
Yes, the problem of course being that, as you say, it would be "meaningless". The Fed has waited too long and been an enabler of irresponsible behavior and corrupt/fraudulent governments for far too long. They, like the dollar, are now becoming irrelevant.
Full faith and credit as it were...
tick tock motherfuckers...
hmmm, can you say Inverted yield curve?
Is that an upsidedown smile? Could the market be frowning?
"I have no mouth, & I must scream." - the Market
Bottom line; Far too many paper claims on real goods and services have been created...
tick tock motherfuckers...
The solution is more paper claims.
Sincerely,
Asshat Economist.
Those look like Ben and Yellens heart rate charts?
Nothing will change if rates are kept at a quarter point, when policy rates were zero - .25%. The chart has seen a sudden, if inexplicable rise in the discount rate on the day of the announcement:
http://scharts.co/1BupPwm
I've said for the last four years that the Fed should have manged the Dow back into the 10,000 to 12,000 area and managed it there to allow a natural recovery instead of which it's blown another bubble.
DavidC
10,000 to 12,000? They should have left it alone in the first place and let it find its bottom at around 4,000.
"Natural Recovery" implies that a free market based on fundamentals exists without the need of a FED. No wonder no one listened to you; especially the FED.
Don't worry thats right were its going if the Fed ever gets out of the rigging business.
Parity with gold.
We had to raise rates before we could lower them again.
What are the chances they raise rates .25 and then announce another form of QE?
Nice! That is so fucking insane that it is likely to happen.
Does .25% really count as a raise?
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That is what this has come down to? A word "patience" and non-rate hike of .25%.. No wonder the UK, Germany, France & Italy have joined the Chinese equivalent of the World Bank. Furthermore, it is likely the rest of Europe, Canada & Australia will join and maybe even Japan; deadline is March 31st for "founding membership". No invitation was extended to the U.S. that I am aware of.
... Its all Fairy Dust until the day we finally see " CURBS IN" Flashing across the "Breaking News" power lunch set.
Sue looks worried Ron, you better go over there with Art and have a little talk... Oh, and Take Bob with you, stay with close family until the Fed gets here for the rally.
I've studied classical econ 101, read Von Mises, Chicago School,....
I dont claim to understand much except that detailed discussion about corruption mechanisms are glaringly absent.
I was livid when 2008 happed! Watched with disgust at the various QE's.
I've been following as closely as possible the BRICS movement and see it as a global grasp to flee this private central bank organized crime ring.
What the Fed/City of London/Satanist Cabal does wont surprise me (I think).I mean is Obama/Cliton/Bush going to announce gold confiscation again? How about starting another really big war? I got an idea - how about poking a really big bear in the eye?
This Beast is fighing for its existance after a century of bloodsuking, it's not going to go quietly.
+.25% AND QE.
Winner, winner, chicken dinner.
Having worked in government for quite a few years, my bet would be that, in spite of poor economic statistics, they will take the word "patience" out because they think that this will serve to shore up their credibility. It will have absolutely no impact on their continued maintenance of a loose monetary policy for the forseeable future.
Positive interest rates are soooo 20th century. A 25 basis point increase wouldn't do anything but cause a snit fit on Wall St. and we can't have those delicate souls at the mega-banks wetting their pants either.....
Believe it or not, the FOMC begins and ends every meeting with this theme:
https://www.youtube.com/watch?v=AKC8pSFg1Vw
Back in the day, before affirmative action, this used to be the theme song of the Detroit Police Department.
I thought they used this theme song...F-Troop...
https://www.youtube.com/watch?v=-K4BvF_sb3Y
I prefer to think it's the theme from the Benny Hill Show.
The only thing we know for sure is they will make the wrong decision.
I decree 10:10 am & pm to be offical curse a banker time.
If you see this time on a clock, please wish a banker of your choice ill will.
Poor schmucks just don't know what to do...
They ought to give themselves pay raises for all the brain power it's gonna require to figure out how to press the CTRL+P button & flood Wall St. with more joobux.
Wouldn't want the price of those high rise jap lairs in Manhattan to start tanking... Yo'd be able to hear the wailing & whining all the way up in Yonkers.
Failed strategy. Failed policy. Failed appreciation for unintended consequences. Failed sense of omnipotence. Failed underlying premises.
Just consistent failure from one move to the next. They're self-interested, myopic failures, and it's time for them to embrace their total failure and go failing away into the sunset on their failboat.
it is almost like they never studied economic or the great depression
It's almost like they intentionally want to sweep up the wealth of the world for themselves.
Here's the dirty little secret facing the FED going forward; interest rates CANNOT go up or else the interest on the $18 trillion + debt [and growing] will bring the Ponzi scheme of fiat debt to an end. The financial elite will do absolutely everything imaginable before the "game" ends. It will be "talk, talk, and more talk" followed by leaks to the MSM that maybe rates can go slightly higher; it won't happen because once you start down this path they lose control.
www.traderzoo.mobi
... I remember when 18 Trillion seemed like a lot of money! Not so much today.
I just hope i live long enough to see the day when interest rates don't give a crap what the Fed does or says.
What is after quadrillion; we may need to know?
Scientific exponential notation, coming to a currency near you! :>D
So what's to keep the Fed from just printin more bucks, or more simply cooking the books? Or something even more devoious?
It's never stopped a CB before, remember Weimar?
You think Mericans are going to revolt or something?
Everything is bad if not worse than befor the Lehan collapse. Everything except the Market indicies, which because of QE 1,2,3 and now QE from the ECB have been artificially propped up. How long this will last nobody knows. Type Lehman in the Zerohedge search box and hit enter. The words "Prices Plunge" "Worst since Leman" "Wholesale sales Plunge" "PMI Crashes""Growth tumbles to record low""Baltic Dry plunges, hits 29 year low." I can go on and on. This whole fucking thing is about to implode. Plan accordingly,...
I don't believe those with $1 Million or more are worse off.
According to the chart, QE should have started 12/14, someone forward this to the FED!
Typical FED behavior since Greenspan f*cked up in 1987. He raised rates immediately after assuming office. The market threw a tantrum (tanked). So, now they go slower. They talk like High Priests about otherworldly notions that the Plebs could never possibly understand. Then, they just wait for market drops to justify more counterfeiting.
When you have Carte Blanche a conundrum is someone else’s problem.
Rate cut?.. ..whatever
Are they going to continue to make ( RIG ) the "the market" go up, that is the real question ( that nobody is asking, so I will ) ... Are you fuking assholes going to make ( RIG ) the market go up even after your silly ass 1/4 point cuts start?
Time for a cigarette break; is that still legal?
These mindless craven fuck wits only exist because other mindless craven fuck wits who are so fucking sycophantic that their brown noses are so caked in Fed shit they cant pull them out, listen to them.
Such intelligent people using made up government and FED numbers. I guess that's what happens when everything you thought was real turned out to be one big ponzi. Just ask all those people who were talked into getting that college degree that will do absolutely nothing for them in the real world. As technology grows less and less people will be needed to write pointless articles to try and justify their careers. We can just leave it to computer generated articles to tell us how good or bed things are.
Of course if you bring out some hot 20 or 30 something with huge tits and a fine ass, I'll obviously listen to what she has to say.