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Yellen's "New" Mandate - Why We Are All Fed-Watchers Now

Tyler Durden's picture




 

Submitted by Paul Brodsky via Macro-Allocation.com,

The Fed’s Calculus

We have been watching the Fed professionally since 1982, when the weekly release of Money Supply was the thing. This is not meant to imply that being older than the hills gives us special insight into when the Fed will hike rates – a lack of insight we accept not necessarily because we are slow learners, but rather because the Fed is a living organism with changing mandates and incentives adopted for changing economic and market conditions.

For example, according to the Fed’s website:

"The Federal Reserve System and public- and private-sector analysts have long monitored the growth of the money supply because of the effects that money supply growth is believed to have on real economic activity and on the price level. Over time, the Fed has tried to achieve its macroeconomic goals of price stability, sustainable economic growth, and high employment in part by influencing the size of the money supply. In the past few decades, however, the relationship between growth in the money supply and the performance of the U.S. economy has become much weaker, and emphasis on the money supply as a guide to monetary policy has waned."

And so, as the Fed notes, US monetary aggregates have been relegated to the bank bench of economic data. The reason behind this – the overwhelming emphasis on fractionallyreserved bank and fully-reserved shadow bank credit that eventually usurped the importance of the money stock over the last few decades (and made possible by twenty years of easy credit conditions overseen by the Fed) - is not discussed on the Fed’s website. Perception is everything in contemporary economics and the Fed is the center of perception; the medium has become the message.

This is not gratuitous Fed bashing, but rather an observation directed at where the esteemed institution sits in the global economy and how it positions itself in the narrative. Though it must pose as an erstwhile body of best-in-class econometric modelers and policy wonks applying its findings to optimize sustainable economic demand; the Fed is, in reality, an erstwhile cabal of respected theoretical extrapolators jerry-rigging credit rates to fit a public narrative it also creates.

The truth is more this: the Fed no longer reacts to the waxing and waning of animal spirit-led demand. In the current monetary regime it exists to create and maintain animal spirits with a secular policy centered on ever-expanding credit, but it is very aware that admitting it’s centrality would defeat its purpose.

If there is any benefit to torturing one’s self by Fed watching for thirty-odd years, it is the knowledge that its credit and communication policies are as circular as the monetary system it oversees.  

A New Narrative 

The Fed did not raise its target for Fed Funds yesterday and suggested recent global economic weakness and implied potential US dollar strength were the main reasons. According to Chair Yellen: “A lot of our focus has been on risks around China, but not just China – emerging markets more generally and how they may spill over to the US.”

We have two main observations that suggest a meaningful shift in Fed oversight and communications.

First, by waiting and citing global economic weakness, the Fed effectively took responsibility over the exchange rate of the US Dollar - oversight traditionally managed by the Treasury Department.

 

One does not have to go back to the eighties to know that US Dollar policy has historically been the specific domain of the US government. Ms. Yellen’s willingness to disregard any mention of “a strong-dollar policy” made famous by Robert Rubin’s Treasury implies: 1) a fundamental shift in control over the economic policy narrative put forth by the United States, and 2) the US wants to send a message to foreign monetary authorities that it will let the US dollar weaken…for now.

 

It seems economic authorities and commercial operators in China and everywhere else now need only watch and listen to the Fed to understand US policy towards the Dollar and now know that the US will support their efforts to stabilize their economies. (More on this in later reports.)

 

Our second observation is that Ms. Yellen’s comments yesterday make clear that the Fed is implicitly judging the health of the US economy by incorporating global factors that may directly or indirectly affect its formal domestic macroeconomic mandates of price stability, sustainable economic growth, and high employment.

 

This had to happen eventually. US dollars are not only the domestic currency Americans use to consume, invest (and ostensibly save); they are also the world’s most dominant reserve currency used in trade and the one in which significant global debt is denominated. Ms. Yellen’s tacit admission that the USD is a consideration in the Fed’s decision to maintain zero-bound US rates a little longer does not necessarily suggest that the Fed does not believe the US economy, per se, could not absorb a rate hike.

Taken together – unilateral authority over US dollar policy, an implied acknowledgment that the global economy could not yet withstand a stronger US dollar (but don’t mess with us!), and the US economy would suffer as a result – is the likely calculus behind last week’s Fed rate decisions.

The implication for investors in the US and everywhere else is, to paraphrase the famous line credited to President Nixon after the 1971 USD/gold default, we are all Fed watchers now. Regardless of focus, there has never been a better time to include macroeconomic analysis in one’s investment process.

 

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Fri, 09/18/2015 - 21:24 | 6567749 ebworthen
ebworthen's picture

The FED's website and all their talk is BULLSHIT.

They work for the banks, not .gov or the People.

And We The People are the lowest on the totem pole.

Fri, 09/18/2015 - 21:43 | 6567764 CaptainAmerika
CaptainAmerika's picture

raising interest rates will 

 

1.  divert money into bonds/savings accounts, and thus pop the ridiculous stock bubble whichis fueled by blind 401k ponzi sheep

.

2. crash the weak real estate recovery since the prices of homes will have to come down as people's monthly payments would be more

 

3.  the exponentially growing historically off the charts debt of the US government would be obviously/blatantly un-manageagle(becomes too big to hide...and nobody will buy the debt anymore at low interest.....unless they do QE counterfeit money to illegally "monetize" the debt again)

 

the weak data-fudged "recovery" is a sham of all shams.  Yellen said the economy is "good"......ha ha ha ha.  In no reality does a "good" economy have to have PANIC level interest rates.

 

Central banking and govt complicity/partnership is driving the whole global system over a cliff of historical proportion.  

Americans are not brave enough to be free...they rely on govt and central bankers to run their lives.  A free economy would have interest rates(and every other component of free economic activity) set by free market price discovery rather than blow hard politicians and corrupt unelected officials in the FED that have the power to print money behind their un-auditable BS.

Fri, 09/18/2015 - 22:05 | 6567849 nope-1004
nope-1004's picture

You used the words "real estate recovery".  I lol'd.

 

Anything that is 0% down payment with 0% interest ain't a market.  And no, I'm not picking your post apart, just pointing out the absurdity in how we frame certian aspects of this ponzi and it's just funny that conventional MSM calls housing a market.

Try go buying fuel or food on zero down zero interest.

 

Sat, 09/19/2015 - 00:30 | 6568200 Shaznardickleze...
Shaznardickleze the Doon's picture

I was thinking of holding out a few more years just to see if the FED will pay me to get a mortgage. To NIRP-finity and beyond.
How do you end a corrupt banking system?

You let them crush under their own debt and go on a financial fast. 

Sat, 09/19/2015 - 04:56 | 6568526 Four chan
Four chan's picture

To a bank, its product is money, aka debt. It is poison like anyone having too much debt, or a business that has too much inventory. nirp is both a theft mechanism against savers and a weak way to force people to get the poison of the feds debt out of their system and into the peoples hands where it can be silently stolen through inflation aka dealuation aka printing. THE FED IS FUCKING EVIL AND HAS BEEN FOR 100 YEARS!!

Sat, 09/19/2015 - 20:02 | 6570199 All Risk No Reward
All Risk No Reward's picture

Can anyone on Zerohedge quote the Fed's actual SINGULAR MANDATE?

That's right, the "dual mandate" is doublespeak meant to dupe the masses.

Search "Federal Reserve Act Section 2A and reply with the actual SINGULAR MANDATE (that has multiple objectives IF THE SINGULAR MANDATE IS FOLLOWED!).

Sat, 09/19/2015 - 07:55 | 6568661 yogibear
yogibear's picture

And the bad part is their top people (Evans, Bernanke,etc)  were professors polluting the young minds with Keynesian bullshit. 

Then the youth act parrots, propagating more BS.

Sat, 09/19/2015 - 11:21 | 6569011 KnuckleDragger-X
KnuckleDragger-X's picture

Mandate? Ain't that a gay dating web site???

Fri, 09/18/2015 - 21:29 | 6567763 q99x2
q99x2's picture

macroeconomic (reality) analysis in one’s investment process i.e. short the market. FED software has encountered a glitch.

Fri, 09/18/2015 - 21:37 | 6567781 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

Old Yeller's new mandate is to watch America get flushed down the shitter for posterity sake, while the rest of the world sits back and laughs at exceptionalism run amuck.

Fri, 09/18/2015 - 23:05 | 6568012 palmereldritch
palmereldritch's picture

But on the upside Yoda was able to successfully launch his new Reality Television series

I am Janet

Sat, 09/19/2015 - 00:52 | 6568248 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

And her first guest transvestite would be none other than Bruce Jenner for ratings.

Sat, 09/19/2015 - 07:59 | 6568665 yogibear
yogibear's picture

So it's the Federal Reserve Keynesians vs the Kardashians. 

Fri, 09/18/2015 - 21:47 | 6567809 blindman
blindman's picture

since 1913 they have staked their claim
on everything, do you get that? really,
do you get it?

Fri, 09/18/2015 - 23:44 | 6568086 palmereldritch
palmereldritch's picture

Got it!

And this one is posted for you...knowing you love music

But with the qualifier that I have posted this song before but it is multiple-post-worthy IMO

https://www.youtube.com/watch?v=RHsNhPiaWBk

 

Enjoy buddy

Fri, 09/18/2015 - 23:58 | 6568139 runswithscissors
runswithscissors's picture

"since it's founding in 1913, the federal reserve system has evolved to meet the needs of a changing financial system and a growing economy. Its unique structure, however, remains its most outstanding feature and its greatest strength" ~federal reserve structure & functions 2006

Sat, 09/19/2015 - 00:53 | 6568255 palmereldritch
palmereldritch's picture

https://en.wikiquote.org/wiki/Mao_Zedong

Mao Zedong! Amazing man! Imagine him and his followers wandering through China day and night, fighting for their goal. What an effort. He has also written beautiful prose and excellent poems.

  • Carl XVI Gustaf of Sweden in Damernas Värld 34/1972 answering the question "which man has made the most influence on you?" Translated from Swedish
Sat, 09/19/2015 - 07:43 | 6568643 Arnold
Arnold's picture

You must have read "Ring of Fire" by Eric Flint.

Fiction , but enlightening.

Fri, 09/18/2015 - 23:28 | 6568074 Atomizer
Atomizer's picture

Janet Yellen needs a new eyeglass prescription to read the present economic charts. Lately, she has been boning up on Bernanke's book called....

Essays on the Great Depression: Ben S. Bernanke ...

Fri, 09/18/2015 - 23:40 | 6568103 DontFollowMyAdv...
DontFollowMyAdviceImaDummy's picture

Get it right... Fed / nana Yellen didn't raise rates because they're HOPELESSLY CORRUPT or at the very best criminally incompetent.

Sat, 09/19/2015 - 00:53 | 6568254 fowlerja
fowlerja's picture

Thank you for your brilliant explanations of the market place...I now have better insight on whether to invest in company a,b,or c. Excuse me..do you have an economics degree in "the theology of macro structure of a modern day society fueled by cheap credit and central management revolving on PhD studies of best case quantitative methods". Anyway that was my best guess..I mean my best analytic guess based on the substructure of your analysis.

Sat, 09/19/2015 - 01:31 | 6568313 Hohum
Hohum's picture

it's = it is.  Grammar, people.

Sat, 09/19/2015 - 03:32 | 6568465 tc06rtw
tc06rtw's picture

 
        … you misspelled  “Grandma”.

Sat, 09/19/2015 - 01:56 | 6568348 Bunga Bunga
Bunga Bunga's picture

Financial repression coming:

U.S. Raises Fee To Expatriate By 422% A Second Time

http://www.forbes.com/sites/robertwood/2015/09/18/second-422-hike-in-fee...

Sat, 09/19/2015 - 07:29 | 6568626 Last of the Mid...
Last of the Middle Class's picture

The Fed exists to protect the banker class and that's exactly what it will do until it's abolished. A political organization with unlimited ability to print money denying anyone a peek at it's inner workings. What could possibly go wrong?

Sat, 09/19/2015 - 07:54 | 6568660 Arnold
Arnold's picture

I find 'The Fed' disconnected.

Could be their evisceration and mummy wrappings.

Sat, 09/19/2015 - 08:30 | 6568691 auntiesocial
auntiesocial's picture

don't follow me... I'M LOST!

Sat, 09/19/2015 - 09:20 | 6568706 Not if_ But When
Not if_ But When's picture

I live in New Hampshire.  With the nation's first primary, we are more focused than other states at this point on the presidential election cycle.  There are candidates all over the place.  By far the biggest issue is income inequality and the outrageously good fortunes of the .01-1% since the economic crisis relative to the middle and working class.  (as clearly revealed by the Census Bureau's household income chart this should actually also include the top 5% and 10% as the only groups whose real incomes have not FALLEN since then).

At any rate, it astonishes me that there is so much concern about this issue, but then a complete and utter DISINTEREST about the FED's contribution towards it.  As though people are so dumb or trusting that they do not wish to explore just why the income inequality they are so concerned about exists.  IMO it is the act of a fool to identify and complain about income inequality as the #1 issue and then be stupid enough not to take the obvious next step to learn how it has happened.  And I believe much of it - in addition to the belief & trust that the FED is here to serve and come to the rescue of the typical American - has to do with the fact that Americans are totally intimidated by the concepts and language used by the financial industry and FED.  Their eyes glaze over and they cannot comprehend the most basic economic thoughts or principles.  When it comes to monetary policy and its affect on households they are like 6th or 7th graders.  Just where the FED and its ilk want them to be.

Sat, 09/19/2015 - 09:44 | 6568778 Occams_Razor_Trader
Occams_Razor_Trader's picture

Zionist Jews less then .2% of the World's population
But.... 100% of the Federal Reserve chairpersons in the last 30 years .
Nothing to see here..... Move along!
Nothing to see here..... Move along!

Sat, 09/19/2015 - 10:57 | 6568940 I Write Code
I Write Code's picture

Excellent post.

The truth is more this: the Fed no longer reacts to the waxing and waning of animal spirit-led demand. In the current monetary regime it exists to create and maintain animal spirits with a secular policy centered on ever-expanding credit, but it is very aware that admitting it’s centrality would defeat its purpose.

True, but perhaps a little unfair - the problem is there has been no "waxing" of animal spirits since 2008 because the economy has never motivated any such thing.

What the author doesn't discuss are the mechanisms by which the Fed now acts, not just money supply (in the trillions) but direct intervention in who knows which markets, but certainly US equities and futures, while it's not clear they have the legal, moral, or ethical authority to do so.

Sat, 09/19/2015 - 13:23 | 6569299 Spiritof42
Spiritof42's picture

If they knew what they were doing, matters wouldn't be this bad. I can't think of a more succinct reason to assume they screw up everything they touch.

If you are a trader, the only reason to pay them any mind is to anticipate the market's reaction to them.

Sat, 09/19/2015 - 17:50 | 6569927 polo007
polo007's picture

According to Bank of America Merrill Lynch:

https://app.box.com/s/2x1jqc1901tv8v00mbqnqjfbu8rrqzzp

The HY Note

Global growth concerns spread from us to Fed

A slow moving train wreck

Today’s Fed decision was the second worst outcome for risk markets, in our view. We have written on numerous occasions that if the Fed didn’t hike rates today initially markets would rally modestly before selling off. The realization that global growth concerns are not only real, but very dangerous right now should cause a risk off environment. And with no room to cut rates, we question the Fed’s ability to manage any further slowdown through what would have to be QE4. However, we can’t see how additional quantitative easing will help, as the goals of QE have already played out: the banking system has recovered, rates are low, investors have driven debt issuance and asset prices to uncomfortable levels, and the housing market has recovered enough to not be a concern.

Furthermore, lower rates don’t help high yield at this point. Whether the 10y is at 2.20% or 2.0%, does the asset class really look all that more compelling? Not in the slightest. In fact, outside of hiking while sounding very hawkish, not hiking and sounding very dovish while expressing concern about the global economy may be the worst thing that could have happened today.

We have been saying for months that the global economy is weak and the Fed’s dovish disposition today only bolsters our view. Europe is about to enter QE2 as inflation and growth remains poor. Japan and Brazil were just downgraded. Commodities remain   under pressure and we think, at some point, the narrative could turn from a supply driven story to a demand driven one. Domestically it becomes harder to argue that a strong dollar and the lack of inflation can be viewed as transitory and this headwind is continuing to hurt high yield corporates. Manufacturing is uneven, consumer spending hasn’t improved in a year, and 2014 real median income was down 6.5% versus 8 years ago (and down 7.2% from the 1999 level). Although auto sales remain strong, we would expect as much given low gas prices, an aging fleet and the fact that auto loans are one of the few places in the economy where it’s easy to obtain credit.

Additionally, high yield corporate earnings remain incredibly weak, with yoy earnings growth negative for the first time since the recession (even ex: commodities EBITDA growth is only slightly positive). Leverage is at all-time highs (again, even ex- commodities) and the High Yield index is more globally exposed than it has ever been (35% of the market generates 45% of its revenue from outside of the United States, and that doesn’t include Energy, which is globally exposed despite not realizing significant direct sales abroad).

Not only are earnings weak, but there has been next to no capex investment, debt issuance has been massive, and buybacks and dividends have driven equity valuations as CEOs and CFOs, afraid to invest in organic growth, have chosen to buy growth instead. And as a result, recovery rates are 10-15ppt below historical norms and defaults and downgrades are creeping into the market. Although we understand many will say its just commodities, is it really? What started as coal weakness 18 months ago became coal and energy weakness. But it wasn’t really just the commodity sectors, as retail was also already weak. Now it’s the commodity sectors, retail and wireline (but definitely not all of telecom). The situation almost seems unbelieveable, as everything that seems to go wrong is explained as being isolated (AMD, well, of course semiconductors are in a secular decline) and treated as a surprise (Sprint).

In our view, the makings are there for a risk off environment for some time to come. For non-commodity spreads to be 400bp tighter than in 2011 makes little sense to us. Replace Greece for a much bigger problem: China. Replace Washington dysfunction and debt downgrade with uncertainty about monetary policy and EM weakness (though we may see Washington dysfunction very soon between this fall’s budget talks and the presidential race looming). Replace US QE with European QE. Additionally, replace   strong earnings growth and margin expansion in 2011 with no earnings growth, a stronger dollar, and higher leverage today. Replace decent liquidity back then with poor liquidity now. And replace the fears of a double dip recession with the potential for fears of a global recession. Though this last point has yet to play out, we think it’s only a matter of time before investors begin to feel as bearish as we do.

The Fed had an opportunity today to hike rates and begin to build a cushion should the global slowdown be so severe it can’t be ignored. Instead, they chose to wait. In our view, this has left them in a predicament as now the rumbles of never being able to increase rates will become even more exaggerated, and when they ultimately do, we think it will be more painful than if they had gone today. We expect as a consequence for there to be more market volatility, more uncertainty around the Fed’s motives and belief in the economy, and therefore more downside risk. Most importantly, however, the acknowledgment of weakness only bolsters our view that we are in the midst of the beginning of the end of this credit cycle, and we warn investors to tread carefully not try to be a hero into year end.

Now is the time that investors need to be managing risk rather than looking for alpha. 1 or 2 names will destroy the performance for what has otherwise been a good set of holdings. Remember what many have forgotten over the last 7 years, credit returns are skewed to the downside. The best case scenario is to earn coupon and the ultimate payment of principle. The worst case scenario is 40, 50, 60 or more points of loss.

We’re in the midst of watching a slow-moving train wreck, and in our view the Fed confirmed as much today.

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