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How The US Economy Underwent Half A Rate Hike In The Past Week Without The Fed's Permission
Perhaps the single biggest catalyst for today's ramp (in addition to the biggest short squeeze of 2015) were the following three soundbites from Bill Dudley:
- CASE FOR SEPT RATE HIKE LESS COMPELLING,
- I REALLY HOPE WE CAN RAISE RATES THIS YEAR, and yet
- FED'S DUDLEY SAYS "WE ARE A LONG WAY FROM" ADDITIONAL QUANTITATIVE EASING
... which to everyone was a tacit admission that the door to more QE is already open, and just needs a stronger push.
But the one line that should have been everyone's focus is the following:
- DUDLEY: STOCK DROP HAS LITTLE SHORT TERM EFFECT ON U.S. ECON
The reason why this is interesting, is that Goldman's alumnus at the NY Fed admitted that stock prices - artificial as they may be - are not only a "policy" matter to manipulate consumer psychology and confidence, but have an actual, empirical and quantifiable aspect in to the tightness (or ease) of financial conditions, and thus to the broader economy via all traditional monetary tranmission mechanisms.
In fact, as none other than Dudley's former employer, Goldman Sachs, quantifies it, a 10% market drop has the same impact as a 15 bps rate hike. As a reminder, the Fed has been vacilating for the past year whether or not to hike rates by a paltry 25 bps (just so it can then lower rates by 25 bps and launch QE).
Academic research on stock price effect on policy rates
In other words, in the past week, ever since the Fed's FOMC minutes which sent the S&P tumbling from 2100 to their lows in the overnight session, some 13% lower, the US economy underwent the functional equivalent of a 15 bps rate hike, or more than half the rate hike that the Fed has been so terrified to engage in for years.
Here is Goldman's explanation:
A review of the economic literature on the monetary policy reaction to stock market changes suggests that a 10% decline in equity prices lowers the fed funds rate by 15bps at the next meeting compared with what it would otherwise be.
[S]tock price changes have a larger effect on expected policy rates, particularly in high-volatility regimes. It is also notable that most of the studies that have examined multiple sample periods find that the Fed's reaction to equity prices was stronger in the pre-Greenspan era and weaker more recently. Studies that exclude the 1987 stock market crash also find a weaker reaction function. Taken together, these lines of research suggest that if the reaction function that prevailed over the last few decades still holds, a 10% decline in stock prices should result in a fed funds rate about 15bps lower after the next meeting than it would otherwise be.
As a rough check, we can also estimate the effect of the stock price decline on the output gap via wealth effects. Scaling household equity and mutual fund holdings as of the end of Q1 by returns since then, a 10% decline in stock prices would reduce household financial assets by approximately $1.9 trillion. In previous research, we have assumed that each dollar change in financial wealth impacts consumption by $0.02, suggesting that a 10% decline in equities should reduce consumption by about 0.2% of GDP. Running this effect through a conventional Taylor rule would suggest that a 10% decline in equity prices, assuming it does not reverse in the near-term, would call for a fed funds rate 10bps to 20bps lower (depending on the coefficient chosen on the output gap) or roughly the same as the effect implied by the median result shown in Exhibit 1.
While one can debate the numbers, the above analysis reveals three things:
- A rate hike is never, ever positive for stocks, because if one does the presented analysis in reverse, all else equal, the tightening of financial conditions by 25 bps would have a comparable and negative impact on stocks (unclear if as big as a 10% correction although certainly possible) as the resulting implied tightening in conditions.
- The market effectively forced more than half a 25 bps interest rate increase in the past week, or about 15 bps to be precise, something which in addition to the much dreaded Fed hike of 25 bps would mean that the Fed is tightening much faster than it wants. In other words the market called the Fed's bluff, and based on Dudley's comment today, the Fed folded.
- If the market really wants to assure that there is no September, or December, rate hike, then it has to tumble by just the amount needed to assure a 25 bps tightening effect is implicitly achieved. Which means drop by 16.666%.
The irony is that by soaring as much as it did, with the Dow recording its third biggest surge in history, the September rate hike is right back in play. In fact, should the S&P rise another 100-150 points, one can be absolutely certain that Yellen will do what he had planned to do before the recent global risk contagion.
Which puts the market in a big quandary: keep buying, and assure the rate hike the will send it plunging, or tumble, avoid a rate hike, and then rise.
The answer, for better or worse, is in the gallium arsenide hands of a few billion HFT momentum-igniting algos.
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Bullish.
No rate hike. The Dow could hit new highs in a week. No rate hike. Book it.
No rate hike. No rate cut.
...ever again.
Dear Fed,
Please leave.
"...one can be absolutely certain that Yellen will do what he had planned to do before the recent global risk contagion."
Freudian Slip?
Methinks not...
BINGO
Uh. Gallium Arsenide was last year. This year it is Gallium Nitride on Silicon Carbide.
They should force the HFT bots to go back to tubes and mercury delay memory.
Or sodium cyanide.
Dudly with the Bullard today
All of this assumes there IS a market, which clearly there is not.
gallium arsenide is a III-V direct bandgap semiconductor with a zinc blende crystal structure
Fed does nothing. They sit.
If the FedRes is not part of a larger cabal of plunderers, they Cannot raise rates. If they are only an element of a much larger syndicate, and scheme, of plunder, they WILL raise rates.
The artificial increase in the dollar starting last Summer is indicative of a larger syndicate, and scheme, at work, so...
Zion is a scheme, not an ethnicity..
I'm wondering if the Taylor Rule can be applied reliably when all financial markets are instruments of Deep State policy, rather than price clearing mechanisms for producers and consumers.
I knew I forgot something. Just for the sh*t of it, I watched the post-market-close CNBC Monday and Tuesday.
I heard something that I (anyway) had never heard before. And that was one of their douchebags actually identifying a THIRD Fed mandate = ensuring that the stock market also has stability. I had never heard this before - maybe just because I'd stopped watching CNBC for many months. But I still found it very disturbing. Has anyone else heard such a thing? Because no one else on the network called out the comment.
good catch--+1 its called conditioning---in a few more viewing days it will be the accepted reality
what he meant to say is we are about 80 bps away from QE 4. at the end of the day, the fed doesn't MAKE interest rates they SUGGEST them. IF there are more sellers than buyers, rates to up. if 2 of the largest holders of UST need to raise cash (china & japan), they sell and if there's no one around to absorb the supply, prices drop, rates up. yellen & co. just got their book pushed around and they are CLUELESS as to what SHOULD HAVE been done. regardless of how u felt about QE (and I hated it) when rates went sub-2%, she shudda blew-out at least 1/2 if not her whole book (would have locked-in gains) and this way, if China and/or Japan decided to dump, she cud have at least made the case to support the market.now she's fucked IF they decided to start blowing-out because she's stuck with a full-plate of $4.5 trillion (no different than buying AAPL at 110, watching it to to 138, selling nothing, and now sucking shit at 105, hoping it doesn't break 100) and NO political currency to launch QE 4 (although she probably will anyway). this is 1 of the issues with a $19 trillion and growing debt. john adams once said u enslave thru the sword or thru debt. maybe he was onto something.
Herding sheep into treasuries
How long before the gov't mandates 401k X percentage into bonds because the market is too risky and .gov is looking out for your best interest. Of course x becomes x+1 or 2 or 3 quickly in the typical incrementalism fashion
So simple a Yellen could do it.20% max cash out of 401ks,and the balance goes to buy
'safe' USTs to provide a life annuity.The $4.5 tn Fed pile will be gone very quickly.
only let them out of the game after the house gets it's cut---crooks get first go --the cops get the second
This posting sounds like the church "elite" in the Middle Ages debating how many angels could stand on a pinhead.
Oh, that's what they mean by "out of bullets."
Typo?
one can be absolutely certain that Yellen will do what he had planned to do before the recent global risk contagion.
Have you seen him? He looks like a very old Moe Howard.
Get to work Mr Yellen!
This is what I am telling you:
The horse and buggy isn’t here anymore, and the car is this iteration’s horse and buggy, but those capable of catalyzing change is an infinitesimal percentage of the global population, and unless you have more energy to apply than anyone else, you are not the shooter. You are better off evaluating your position in the energy distribution, which will tell you how to employ your time. In any case, you want to minimize your rent and minimize the hours required to occupy the rentiers, and otherwise get on with your life.
I could implement Maglev in that elevator today, and run a train with it, but I’m not going to waste my time, because I don’t care to argue with Fred and Wilma Flintstone. It’s not about US vs. China or Russia. It’s about capital, globally, desperately trying to hold onto the past, with real estate inflation, until it can’t, at which time you might want to be positioned. Don’t go to the hospital to have your children. The critters can no longer bear their own children, and they desperately want you to be in the same boat, an economic slave grown in a superstitious, statistical petri dish.
For 5000 years, the law has taken the leading edge minority and placed it in back, to propel the majority, to nowhere.
Too much Rand.
For every 100K would-be Hank Reardon's there is only one actual.
Those who believe themselves the bleeding edge almost never are.
A sobering thought is that while we all knew that during any dip the Fed does not support the market so much as supplant it, what if they've been supplanting it all along in an attempt to drive implied interest rates below zero?
Essentially the net effect is a gift to their cronies, as a relatively small portion of the population has enough stored capital to benefit in way more than trivial.
Now...given that the Fed are economics IDIOT-savants... what premium do you place on the thought that they may implement the rate hike...and then invest directly to lift the market by an amount equal in size, but opposite in direction to their rate hike?
Essentially, they'd be digging a monetary hole, and then filling it in.
And isnt' that just what their favorite Nobel-Prize-winning economist (Paul Krugman) has been saying the country needs? Pointless un-productive and immediately reveresed labor to stimulate circulation?
Yeah, ... but, ...
Interesting idea, but the thang is, one is not really supposed to happen without the other.
I mean, are you suggesting that now the Fed could raise rates 15 points and the effect on the market would be nil?
Don't let those quantitative models eat your brain, they don't know when you give them nonsense values.
Hello, I follow Zerohedge intensely. One thing that I wish Zerohedge would write an article on is how the baby boomers are effecting the US economy. Another thing that I wish Zerohedge would do is write about how China's citizens are investing so much of their hard-earned savings into real estate as retirement, and what's going to happen when they look to sell their homes to retire (the Chinese real estate bubble). Just trying to be helpful.
It continues to show what a sad state the "markets" are in these days when a 5% year to date correction off of record high prices in the S&P is enough to get the 2nd in charge at the Fed to announce yet another can kick on interest rates and when the self-serving Ray Dalio with his $170 billion hedge fund cries out for yet more QE to make him even wealthier.
Someday, the markets here will go Chinese and all the manipulation and misallocation of central planning will reveal itself.
QE and ZIRP only work for Ray Dalio and Goldman Sachs, who seem to be the Fed's primary constituency. The rest of us were looking forward to a few months of lower gasoline prices without having them skyrocket again with yet another round of QE.
Capital markets are supposed to be markets. They make money, they lose money, they adjust. They are not supposed to assets that are guaranteed to be risk free by the Fed.
Almost 7 years and counting of this pathetic BS. No inflation my ass. Even Walmart and McDonalds are raising wages now as rents and taxes skyrocket.
Not that those arrogant pricks at Goldman are trying to tell the Fed what to do or anything like that (sarc). They might as well be using the invisible hand to slap the Fed across the face and say, no rate hike you idiots.
The rates will go up in Sept, Dec, March 2016, June, Sept, Dec, NO WAIT REALLY AND TRULY, cross my heart and hope to die, It will be 2017 March, June.
Looks like the markets are pricing in the Fed’s rate hike. Tell them again Janet how you are getting near to lift-off. You have enough DATA from around the world. The rate rise will strengthen the dollar and we can get this thing finished with. HA, HA,HA _JOHNLGALT. p.s. There seem to be a lot of John Galt’s out there working toward the same end.