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Fear Or Froth: Zero Rates Are Simply No Longer Needed

Tyler Durden's picture




 

Via Scotiabank's Guy Haselmann,

Massaging for a June Hike

A key factor determining the timing of the first rate hike will be the level of the US dollar.  Over the past 8 months, the dollar appreciated about 18%. This was the second most rapid appreciation of the dollar in so short a period since the US went off the gold standard in 1971. Importantly, the recent appreciation had reached its highest level, and greatest momentum, within a few days of the March FOMC meeting.

The Fed is fully aware that should the dollar’s rise be sustained, it could materially impact the US economic outlook.  Janet Yellen acknowledged this fact by saying that export growth had weakened and import prices were being pressured, “at least on a transitory basis”.  However, she also added that the strength of the dollar also reflected the strength of the US economy.

In general, financial market conditions during the week of the March FOMC meeting were disconcerting, which likely had an impact on the statement and press conference. The Euro was below 1.05 and several EM currencies traded to decade lows. The US 10-year note was trading around 2.10%.   WTI oil closed at its lowest point of the year ($43.46). There are more examples, but the point is that financial conditions are not only less worrisome, but more accommodative today, than during that week.

Since March 18th, , for example, the dollar is 2% lower, the S&P is higher, Treasury yields are lower, and oil is 18% higher (taking downward pressure off of inflation indicators).  If the Fed based its decision solely on those market factors, the probability of a June hike should be higher today (not lower) than it was on the day of the March meeting.

It might sound strange, but the Fed is probably thrilled by the fact that the probability of a June hike has fallen (to around 12% today). On numerous occasions, the Fed has stated its desire to move off of the zero lower bound (ZLB).  If the markets had become truly convinced of a June hike, then Treasury rates and the dollar might have risen further, while equities might have moved lower.  Those conditions could have made a hike in June more difficult.

  • If the Fed Funds rate were 3%, hypothetically, the Fed would not mind if markets ‘did the tightening for the Fed’. However, with official rates near 0%, the Fed would prefer doing the hiking by itself.

The FOMC probably did not want to be too hawkish at the March meeting for fear a market reaction that damaged its own position for rate ‘lift-off’.  It should be remembered that markets were expecting the word ‘patient’ to be removed, thus providing a hawkish landscape that opened up the optionality for a June hike.  In order to prevent tightening market conditions, owing to fully pricing-in a June hike, the FOMC had to provide some dovish offsets (see Great Aunt Addy Policy Aug. 8, 2014). It did so, and then the disappointing, but meaningless, headline employment number, furthered its cause.

In order to proceed with a June ‘lift-off’, it would be ideal for the FOMC if stocks, bonds, the dollar, and economic data were anywhere near current levels by the time of the June meeting.  Economic data is unlikely to move much in either direction by then. Most already know that Q1 was weak, and most believe that Q2 will provide some bounce-back. This scenario would work in the Fed’s favor.

Zero rates are simply no longer needed. The Fed doesn’t need to stay ‘lower for longer’, because it has already done that.  Waiting until September would mean a much greater possibility of missing their window of opportunity.   Market conditions might deteriorate or geo-political tensions rise in a way that more deeply affects the US.  Alternatively, market froth might grow even frothier, causing a larger market reaction than otherwise would have been the case.  Lastly, it would also be prudent to hike well in advance of the $215 billion of Treasuries on the Fed’s balance sheet that matures in early 2016; which, if left un-reinvested, is a defacto-tightening.

The Fed’s data dependency message is bewildering when looking at the economic data.  Regardless of last week’s headline payroll number, employment remains more than adequate and inconsistent with a 0% policy.  The unemployment rate has reached the near full-employment level of 5.5%, and will likely be even lower by June. The 4-week average for jobless claims printed today at the lowest level since April 2000 when the Fed Funds rate was 6%. As far as its inflation mandate, many FOMC members say that they believe inflation will move back to its 2% target in the medium term (2 to 3 years).   And, other than during the 2008 crisis, inflation has been mostly stable for 20 years.

“It's something unpredictable, but in the end is right.  I hope you had the time of your life.”   – Green Day
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Fri, 04/10/2015 - 15:59 | 5980005 lester1
lester1's picture

What part of RATES WILL NEVER BE RAISED does this clown Guy Haselmann not understand ??

 

The Fed has zero intention to ever raise rates and have resorted to their new monetary tool of "jawboning"

 

Fed governors and Janet Yellen know there is too much debt out there to ever again raise rates. If they did try they would pop the stock market bubble they spent 6 years inflating. You would see debt default left and right. Popping the stock market bubble would hurt their friends on wall street. The Fed wont take that risk. They have this new policy tool of "talking" about raising rates without ever actually doing it.

 

June 2015????, September 2015????, 2016 ??? 2017 ?????

NEVER !!!!

 

Keep in mind, if the Fed wanted to raise rates by a small 0.25% , they would have already done it. 

 

 So a rate hike we will NEVER see. However, we will see more and more jawboning by Fed governors to keep the markets and media pundits in line and guessing.

 

 

Fri, 04/10/2015 - 16:11 | 5980082 daveO
daveO's picture

Right. QE counterfeiting ended in Oct. $85B for just 2.5 months equals this statement.

Lastly, it would also be prudent to hike well in advance of the $215 billion of Treasuries on the Fed’s balance sheet that matures in early 2016; which, if left un-reinvested, is a defacto-tightening.

$85 Billion for 12 months = $1 Trillion or 5.6% of the current $18.2 Trillion US debt. 5.6% is what they used to PAY as interest!  

Fri, 04/10/2015 - 16:33 | 5980242 KnuckleDragger-X
KnuckleDragger-X's picture

Reality is never spoken of in polite company, they can't and they won't because they don't want to take the blame for what they created....

Fri, 04/10/2015 - 22:56 | 5981246 chilli sauce
chilli sauce's picture

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Fri, 04/10/2015 - 15:42 | 5980015 Hype Alert
Hype Alert's picture

Everybody is trying to second guess the Fed, but maybe the Fed has already lost control.  June rate hikes have been advertised by the Fed and pushed by Ip and Hilsenrath, but when the labor numbers came out, the party continued.  When will the Fed admit they no longer have the controls of the plane anymore?  The Fed is just tap dancing at this point.

Fri, 04/10/2015 - 15:55 | 5980055 lester1
lester1's picture

All this mindless Fed cheerleading by the media and "expert" economists is driving me nuts !!!!..

 

Lewis Black nuts!!!!

Fri, 04/10/2015 - 16:32 | 5980239 SDShack
SDShack's picture

The Fed knows they have lost control. Now they are just looking for the scapegoat to blame it all on. It's the only way they can say "We were going to raise rates, but then X happened because of bad old Y." It's more of the engineered "unexpected" game. Just another example of pump and dump to fleece the sheeple again.... and again... and again.... Rinse & Repeat. It's all just one great big Ponzi.

Fri, 04/10/2015 - 15:45 | 5980027 El Vaquero
El Vaquero's picture

No longer needed?  LOL!  How is all of that debt going to get repaid if people, corporations and the government cannot take out more debt at super low interest to roll the debt over?  (They won't.)  We are approaching the point where zero rates can no longer be tolerated, yet we still need them and will continue to do so until the dollar goes to its intrinsic value.  Our monetary system is in the process of breaking down. 

 

But yeah, go ahead and raise those rates.  I'm genuinely interested in how long it takes to snap all of the slack out of the system after 6 years of the Fed pushing on a string. 

Fri, 04/10/2015 - 16:02 | 5980083 lester1
lester1's picture

Notice how the Fed won't even do a pathetically small 0.25% rate hike ???

 

Are we not in a recovery ??? Is the economy not strong like they say ????

 

 

Fri, 04/10/2015 - 16:19 | 5980157 El Vaquero
El Vaquero's picture

When it gets serious...

Fri, 04/10/2015 - 15:47 | 5980032 booboo
booboo's picture

tap dancing jews?

"I Knew a Man Bo Janglestein with worn out shoes"

Ahh, great song

 

Fri, 04/10/2015 - 15:51 | 5980036 El Vaquero
El Vaquero's picture

 

The unemployment rate has reached the near full-employment level of 5.5%, and will likely be even lower by June.

AHHHHHAHAHAHAHAHAH!  Fuck you Haselmann!

Fri, 04/10/2015 - 15:53 | 5980046 A is A
A is A's picture

As soon as he started citing completely meaningless official unemployment numbers I stopped reading...

Fri, 04/10/2015 - 15:59 | 5980070 centerline
centerline's picture

Yeah - inflation is really fucking stable... only if you drive by CPI.  Guess what asshole? 99% of the population feels the sting of what is really going on.  What remains of the middle class feels it the worst.  You know... the same donkeys you are trying to screw.

Yeah, yeah,... I know.  ZH bait.  Ranting is good for the soul though.

Fri, 04/10/2015 - 21:05 | 5981013 Cheduba
Cheduba's picture

Yeah, "mostly stable" inflation for 20 years - hundreds of percent increase in health care costs and tuition.  

Does this guy think we are all still tuning in our radios to find out the official story of what has been happening in the world?

Fri, 04/10/2015 - 15:59 | 5980074 LawsofPhysics
LawsofPhysics's picture

What?  Has there been a significant change in the liabilities on the balance sheet of the U.S.S.A.?

Fri, 04/10/2015 - 16:18 | 5980152 El Vaquero
El Vaquero's picture

Yes, those liabilities have gotten bigger.  But I also suspect that more and more seniors are having to eat Alpo soufflé.  The fuckers at the Fed are playing with fire.

Fri, 04/10/2015 - 16:47 | 5980284 The Duke of New...
The Duke of New York A No.1's picture

Can't raise rates yet ... theres still more Seniors to throw under the Bus...

http://31.media.tumblr.com/tumblr_lz1lwc25ox1rnua94o1_500.gif

 

Fri, 04/10/2015 - 16:47 | 5980285 nakki
nakki's picture

Let me help this author out. Check out the FED dots from 2011. Eventually they'll raise rates .25-.5% just for appearances. The funny thing to me is that the FED actors seem so terrified at the thought of even this minimal "hike". We're not even talking normalizing rates to say 4%, we're talking about .5%. Then you have European countries with negative bond yields. Its as if they're trying to start a bank run. You have Mexico issuing 100 year bonds in a currency that won't be around in 20. I have seen what I thought was everything in my days but this last 3 years have proved me wrong.

Now bring on QE4 $100 billion a month.

 

Fri, 04/10/2015 - 19:30 | 5980795 Racer
Racer's picture

Headlights, meet FED

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