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Trick Question Of The Day: How Can The Fed Be Both Forward-Looking And Data-Dependent?
Via Scotiabank's Guy Haselmann,
Yellen would never admit it, but the FOMC is (and has been) on a pre-set course to hike rates in June. However, a pre-set course is not a guarantee. Any deviation from this path has required a significant change in financial, economic, or geo-political conditions, particularly as ‘mid-2015’ has approached. Markets will, therefore, have to contend with one of two evils: worsening conditions, or an interest rate hike in June. In a worst case scenario, markets could be hit by both at the same time.
The first time that ‘mid-2015’ was introduced as part of the Fed’s calendar-based guidance was back in 2012. How could the FOMC have been able to target a date three years in the future with any accuracy, particularly given the Fed’s dismal forecasting record? What the Fed knew back in 2012 was that Operation Twist replaced short-dated bonds with securities due to mature beginning in 2016. In other words, the Fed knew in 2012 that because its balance sheet would begin shrinking quickly in early 2016, they would be forced near mid-2015 to make a few decisions.
How can the FOMC be both forward looking and data dependent?
A declining balance sheet is a defacto tightening. Therefore, it is hard to imagine the FOMC beginning the normalization process of lifting rates at the same time the Fed’s balance sheet is shrinking. Since the FOMC has appeared highly sensitive and concerned about the market’s reaction to ‘lift-off’, the last thing the Fed would want is to have two policy changes at the same time. This is why the Fed has been on a pre-set course for quite some time, i.e., a mid-2015 rate hike prior to the 2016 maturities. If they don’t hike in ‘mid-June’, it will be because serious problems have unfolded (which in turn complicates their options in 2016).
The FOMC has been hoping that economic conditions would cooperate enough to justify a hike in June. To date, it has not been a stretch to believe that the Fed could have gotten lucky with the timing of the business cycle. However, it is also possible that the FOMC missed the ideal window for ‘lift-off’ (2014) and now risks a downturn in the cycle. It is interesting that should the Fed hike, the Fed could get the blame for a market and/or economic down turn.
Since the FOMC has moved the guidance pertaining to ‘lift-off’ so frequently in recent years - in order to delay the timing and pace of accommodation - investors never believed the warnings of a mid-year hike with much conviction. It is for this reason that the market’s pricing for the future level of Fed Funds was always so far below the Fed’s dot plot (Today, the average level, of where the FOMC believes the appropriate target level of the fed funds rate should be, fell materially over the next two years.)
Therefore, should markets have been surprised today by the magnitude of drop in the dot plot? After all, since the Fed’s predictions for this level fell toward what the market was already pricing in, it could be argued the market over-reacted.
However, there is another possible explanation. Concerns around the market’s reaction function to a hike have been one of the reasons for FOMC emphasis on ‘gradual’ and ‘measured’. Tempering expectations on the speed of rate hikes has likely helped the Fed mitigate and control potential market downside fears. What the Fed was able to accomplish today (deliberately or by accident) was to also mitigate the potential market fallout by capping expectations for where the terminal fed funds rate will be at the end of the hiking cycle. Markets might be adjusting accordingly. (Crowed long dollar trades may be the most impacted over the next few days)
The lowering of the dot plot means that financial assets may only be able to price-in a few periodic hikes, rather than a series of hikes that brings Fed Funds to some higher long run equilibrium level. This requires a good deal of faith that the Fed will ultimately do what they are forecasting. The market may re-adjust in the near-term, but such faith will be difficult to maintain on the day of the first rate hike, regardless of what the Fed is forecasting.
Today’s meeting does not change my odds of a June hike. The Summary of Economic Projects (SEPs) forecast full employment in 2016. The SEPs also did not show a drop in inflation forecasts for 2016 or 2017 (and the upper end of the range is near the Fed’s 2% target). As a matter of fact, Stan Fischer was asked three weeks ago at a conference about the recent drop in inflation. He said that the Fed could still hike rates “if it had reasonable confidence to believe that the inflation rate would return to its 2% target in the medium term – which I define as 2 to 3 years’ time. I have great confidence that target will be met, I assure you”.
Furthermore, conditions to hike rates might be as close to ideal today as they are going to get. Combined with the reasons above, the unemployment rate (5.7%) is near full employment. Inflation is expected to be at target in the medium term and has been relatively stable for 15 years (ex-2008/09). Interest rates and spreads are low. The equity market is near record highs. WTI oil is trading below $45 per barrel. Market speculation is rising. Lending standards are falling. A growing number of international debt securities are moving into negative yields. US corporate debt issuance continues to break records. Many are these conditions advanced further today. The general risks to financial instability continue to mount.
A zero interest rate policy (ZIRP) is a temporary choice that should be reserved only for emergency situations, because after crisis conditions lift, unintended consequences begin to mount. Yet, the Fed has maintained this policy for the past 6 years, while the US economy has grown and continues to plod along. Foreign countries are implementing aggressive policies to combat their own challenges. The US veered out of an emergency state a long time ago (pick the year), so the Fed should have already move away from its ZIRP.
I still like hiding in the back end of the Treasury market for the reasons I have outlined ad nauseam. Longer-term, I expect the dollar to rise but suspect a retracement and flush-out of crowded exposures will take place over the next couple of weeks. Equities remain in a virtual world where front-running Fed accommodation trumps the reality of extreme fundamental valuations.
“The best way to predict the future is to create it” – Peter Drucker
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Ignorance is bliss would be a good start.
The fed is double minded.
Evils mind, has no end, it's why infinity was invented.
If the FED is data dependent, someone has to ask Yellen why we need the FED. The market can reed the same data.
Good question.
Here's a great outline of how we got here, starts slow but a great read:
http://debtcrash.report/entry/history-and-introduction
Sillies..
They depend upon the data they fabricate to project a vision of the future they are arrogant to think all of the sheeple we will fall for.
Anybody not in a government propaganda or pharmaceutical induced delusion can see that.
Lead from behind is the meme.
Predicting the future is easy when the c(h)attle go over the cliff before you do.
Dupl
Or two faced....
If Yellen has 2-faces you think she'd be using the one she has?
And unstable in all their ways.
Not double-minded. Just a classic Head-fake.
People will see and hear what they want to. QED.
p.s. No one ever went broke betting on the Laws of Nature, or laws of human nature.
What's in you wallet?
they look at whatever dataset suits them. much like politicians.
Or throw darts at a dartboard.
Yellen's performance yesterday was a joke. But that's what we get when the Fed is the sole source of candy.
Midgets into an enlarge archery target?
Their only mission is to convince you Capitalism is a failed system.
That's been true since their 1913 origin.
All designed to convince you to reject freedom.
Bingo. They have slowly, carefully, deviously mutated into a non-Capitalist system while keeping the public at large believing they are living in a Capitalist system but experiencing the "failure of Capitalism". Boiled frogs.
It's called privatizing the profits, and socializing the losses, did you want some fresh corn and crabs to go with those frogs?
I think of it as old fashioned Roman Empire slavery.
Old money.
Call it communism, feudalism, naziism, etc..........
It's Plato's Republic in a nutshell.
Just don't call it utopia.
99.9% of the universe is empty spece.
Reality is an illusion.
Sucks being on the animal farm.
They want the world to beg for chains.
That's total victory.
Obama doesn’t give a whit about the economy.
He just wants to displace the Constitutional United States for his warped vision of a Marxist society.. as long as he gets to keep the perks of being one of the chosen elite.
The Red Shield oligarchy is his path to that end.
He's just another one of the Fabian turtles - he just seems to be moving a bit faster than others and so they are kinda waking up....but just barely...
Does the president or Congress get involved in economy or only the FED....in the old days....the preesident and congress actually ran the country. Protect Obama at all costs
easy and obvious
just make it all up
There really seems to be little value in digging into the entrails of what the Fed leaves behind at this point.
No trick question at all, it is explained here ==> http://en.wikipedia.org/wiki/Schizophrenia
If they don’t hike in ‘mid-June’, it will be because serious problems have unfolded (which in turn complicates their options in 2016).
Guy, you can not afford to be this naive at this juncture of your career.
That's my read, too. I really thought we had one more futile round left in us of the Fed raising rates and quickly finding out it destroys the debt ponzi. Maybe I was wrong. Maybe 2008 was it and even they realize rates can never be raised again without instant destruction.
The only good that will come of all of this is the utter destruction of the financial services industry.
Seen on a highway off-ramp - "Need food will work for a few basis points"
They already know what the "serious problems" are. June is when they will point to them publicly. They painted themselves into a corner the other day so I assumed something big would "come up" around June.
Summertime!!! Yea!
Data-Dependent is just propaganda by another name.
Foward looking is just propaganda by another name.
It is all about the propaganda, just a perception switch trick.
The data is not independent or unbiased when they control the models.
The only way you could even make a case for data-dependent being independent is if the models which the markets trade off of model that data independent of the FED and all financial institutions. Like that will happen, giving up control for credibility.
Heads they win tails you lose Casino.
"It is interesting that should the Fed hike, the Fed could get the blame for a market and/or economic down turn".
"The US veered out of an emergency state a long time ago (pick the year), so the Fed should have already move away from its ZIRP".
So pray tell, why hasn't the un-fed "veered" out of ZIRP? They can't without bringing down this house of cards!
~ "Surrender now, or face utter destruction" - Capt. James T. Kirk
Good Kirk quote. Utter destruction.
All this BS and dance has me bored sick. Interest rate increases are a CB response to inflation. There is none. Period.
The utter destruction came with holding rates low for too long helped a whole bunch by reckless MBS creation and derivatives growth. Creating a whole new cycle / layer of new debt with no income to service it and no inflation to shrink it.
You are a fool and totally stupid to believe anything other than the Fed does what is good for it's owners and shareholders, period.
Audit the Fed and then END the Fed.
You are a fool and totally stupid to believe anything other than the Fed does what is good for it's owners and shareholders, period.
Do you use their fixed face value stock certificates aka FRN notes? That makes you a shareholder also. Do they do good by you? Do you get to control the value of said stock aka through purchasing power aka inflation or negative interest rates which is inflation without using a real economy aka purchasing power to achieve the same ends.
Don't confuse the shareholders with owners because that is the distinction if 2 people hold the same shares of stock in a publicly traded corporation.
"Do you use their fixed face value stock certificates aka FRN notes?"
Not all the time and even then only transiently. I also use a lot of other fiat as we have customers in Russia, China and Brazil. You think the Fed is the only entitie capable of producing bullshit fiat? LMFAO!!!
"Don't confuse the shareholders with owners" - No shit sherlock, ownership has is privileges.
All you need to know right now --> When fraud is the status quo, possession (and a dependable tribe) is 100 % of the law.
TRADE is the only thing that matters, period. when trade stops, the killing starts in earnest. Same as it ever was.
Simple question. As a shareholder does the FED do good by you? Yes or no.
If you don't want to answer directly just up or downvote the comment, same for everyone else.
I would say that when the trade stops, then they collect a one-time 50% tax on the rich. DEFNITION OF RICH: those with more than $10K and less than $1.2Million. Exemption: over $1.2 Million of net liquid cash holdings.
Hey did anyone else notice this nice warm bath, has suddenly gotten very hot ????
Yeah but didn't adam just leave the garden?
As far as that goes most people are data dependent and forward-looking when making decisions---they'd better be. So as far as it goes it's no surprise that the FOMC would be.
The ECB certainly are. Experience suggests that starting a land war with Russia will end in the conquest of the aggressor. The ECB are plaaning for the future by allowing the important to cash out and leave while they can before the Russian army show up in Frankfurt.
The real question is on whose behalf all the FOMC's forward planning is being done. Fair bet it's not the American people.
Command economy at hand. The way this stuff is reported and the way in which the MSM reports on it, and then the manner it is disseminated through the masses, reminds me a lot of Jim Jones. The Kool aid is so apropos.
https://www.youtube.com/watch?v=cRfDE9bndfg
While watching this video, just imagine Yellen speaking the words of Jimmy Jones...
COTD
Trick Question Of The Day: How Can The Fed Be Both Forward-Looking And Data-Dependent?
Haven't we visited this at least 20 times on this site??? They can't...
Huffpo has some celeb bikini pics. Head over there.
This horse ain't done being beat on yet.
Fed doesn't know what to do, except that it wants to extract the last bit of ability to stabilize markets by jawboning alone, which now has been reduced to reneging on its promise to be more open re: foward guidance, and now has resorted to inserting uncertainty and secrecy as it makes its last stand. Will we raise rates or won't we? That is the question.
We'll see how long this bluff lasts.
I watched a few minutes of the Yellen meeting. You could smell the bullshit coming from the TV.
This article is as two faced as the FRB. Worthless.
http://seekingalpha.com/article/3012756-data-is-dead-all-hail-the-fed?v=...
what an awful job that must be.
imagine trying to persuade people to embrace mutally exclusive contradictions - all the time - every day ...
that's got to be a recipe for contracting mental illness.
Reading this is like reading something from M2M, verbatim...
"Furthermore, conditions to hike rates might be as close to ideal today as they are going to get. Combined with the reasons above, the unemployment rate (5.7%) is near full employment. Inflation is expected to be at target in the medium term and has been relatively stable for 15 years (ex-2008/09). Interest rates and spreads are low. The equity market is near record highs. WTI oil is trading below $45 per barrel."
Notice how he stopped just short of suggesting how the falling oil price is helping to 'boost the consumer'...? I think even in the world of financial services rarified air, the word has come down to 'Clam it' with the falling oil price meme...
'How can it be with 0% unemployment wages still don't rise' Alice in Wonderland asked the rabbit.
"... the unemployment rate (5.7%) is near full employment" If you believe that I've got a lot of bridges to sell.