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Central Banks Have Shot Their Wad & The Market Deck Has Been Reshuffled

Tyler Durden's picture




 

Submitted by Doug Noland via Credit Bubble Bulletin,

Most just scoff at the notion that there has been a historic global Bubble, let alone that this Bubble has over recent months begun to burst. Talk of an EM and global crisis is viewed as wackoism. Except that the Federal Reserve clearly sees something pernicious in the world that requires shelving, after seven years, even the cutest little baby step move in the direction of policy normalization.

The Fed and global central banks responded to the 2008 crisis with unprecedented measures. When the reflationary effects of these policies began to wane, the unfolding 2012 global crisis spurred desperate concerted do “whatever it takes” monetary stimulus. This phase has now largely run its course, and there is at this point little clarity as to what global central bankers might try next.

Clearly, great pressure will remain to hold rates tight at zero. I fully expect policymakers at some point to see no alternative than to implement additional QE. But under what circumstances? Will it be orchestrated independently or through concerted action? What about timing? How much and how quickly? Might global central banks actually consider adopting negative rates? Well, there’s enough here to really have the markets fretting the uncertainty, especially with global central bankers not having thought things through.

There is today extraordinary confusion and misunderstanding throughout the markets. Policymakers are confounded. Years of zero rates, Trillions of new “money” and egregious market intervention/manipulation have left global markets more vulnerable than ever. Now What? I’m the first to admit that global Credit, market and economic analyses are these days extraordinarily complex – and remain so now on a daily basis. We must test our analytical framework and thesis constantly.

I am confident in my analytical framework and believe it provides a valuable prism for understanding today’s complex world. The current global government finance Bubble is indeed the grand finale of serial Bubbles spanning about 30 years. Importantly, each Boom and Bust Bubble Cycle – going back to the mid-eighties (“decade of greed”) – spurred reflationary policy measures that worked to spur a bigger Bubble. Inevitably, each bursting Bubble would ensure only more aggressive inflationary policy measures.

It is fundamental to Credit Bubble Theory (heavily influenced by “Austrian” analysis) that the scope of each new Bubble must be bigger than the last. Credit growth must be greater, speculation must be greater and asset inflation must be greater. This Financial Sphere inflation is essential to sufficiently reflate the Real Economy Sphere – i.e. incomes, spending, corporate earnings/cash flows, investment, etc. Reflation is necessary to validate an ever-expanding debt and financial structure, including elevated asset prices. Ongoing rapid Credit growth is fundamental to this entire process, much to the eventual detriment of financial and economic stability.

There are a few key points that drive current analysis (completely disregarded by conventional analysts).

First, the government finance Bubble saw historic Credit growth unfold in China and EM – Credit expansion sufficient to reflate a new Bubble after the bursting of the mortgage finance Bubble. Central to my thesis: when the current Bubble bursts – especially with regard to China – it will be near impossible to spur sufficient global Credit growth to inflate a bigger ensuing Bubble.

 

Second, with the global government finance Bubble emanating from the very foundation of contemporary “money” and Credit, it will be impossible for governments and central banks to extricate themselves from monetary stimulus (any tightening would risk bursting Bubbles).

 

Third, extreme measures - monetary inflation coupled with market manipulation – spurred enormous “Terminal Phase” growth in the global pool of speculative finance. It’s been a case of too much “money” ruining the game.

“Moneyness of Risk Assets” has played prominently throughout the government finance Bubble period. Unlimited Chinese stimulus seemed to ensure robust commodities markets and EM economies generally. Limitless sovereign debt and central bank Credit appeared to guarantee ongoing liquid and continuous global financial markets – “developed” and “developing.” And with governments backstopping global growth and central bankers backstopping liquid markets, the perception took hold that global stocks and bonds offered enticing returns with minimal risk. Global savers shifted Trillions into perceived “money-like” (liquid stores of nominal value) ETFs and stock and bond funds. Government policy measures furthermore incentivized leveraged speculation.

And why not leverage with global fiscal and monetary policies promoting such a predictable backdrop? Indeed, speculative finance has over recent years played an unappreciated but integral role in global reflation. This process has created acute fragility to market risk aversion and a reversal of “hot money” flows.

Central to the bursting global Bubble thesis is that Chinese and EM Bubbles have succumbed – with policymakers rather abruptly having lost control of reflationary processes. Measures that elicited predictable responses when Bubbles were inflating might now spur altogether different behavior. A year ago, Chinese stimulus incited speculation – and associated inflation – in domestic financial markets, while bolstering China’s economy and EM more generally. Today, in a faltering Bubble backdrop, aggressive Chinese measures weigh on general confidence and stoke concerns of destabilizing capital flight and currency market instability.

In the past, a dovish Fed would predictably bolster “risk-on” throughout U.S. and global markets. Times have changed. As we saw this week, an Ultra-Dovish Fed actually exacerbates market uncertainty. The global leveraged speculating community is these days Crowded in long dollar trades. Federal Reserve dovishness – and resulting pressure on the dollar - thus risks reinforcing “risk off” de-risking/de-leveraging. In particular, the yen popped on the Fed announcement, immediately adding pressure on already vulnerable yen “carry trades” (short/borrow in yen to finance higher-yielding trades in other currencies). While EM currencies generally enjoyed small bounces (likely short covering) this week, for the most part EM equities traded poorly post-Fed. European equities were hit hard, while the region’s bonds benefited from the prospect of more aggressive ECB QE.

The bullish contingent has clung to the view that EM weakness has been a function of an imminent Fed tightening cycle. In the market’s mixed reaction to Thursday’s announcement, I instead see support for my view that the bursting EM Bubble essentially has little to do with current Federal Reserve policy.

The bursting China/EM Bubble is the global system’s weak link. Surely the activist Fed would prefer to do something. They must believe that hiking rates – even if only 25 bps – would support the dollar at the risk of further straining commodities and EM currencies. Moreover, the FOMC likely sees any “tightening” measures as exacerbating general market nervousness and risk aversion. Moreover, the Fed must believe that dovish surprises will be effective in countering a tightening of financial conditions in the markets, as they were in the past.

Major Bubbles are so powerful. It was amazing how long the markets were willing to disregard shortcomings and risks in China and EM (financial, economic and political). Similarly, it’s been crazy what the markets have been so willing to embrace in terms of Federal Reserve and global central bank doctrine and policy measures. With their Bubble having recently burst, Chinese inflationary measures are now significantly hamstrung by an abrupt deterioration in confidence in policymaker judgment and the course of policymaking. I believe Thursday’s Fed announcement marks an important inflection point with respect to market confidence in the Fed and central banking.

Japan’s Nikkei dropped 2% Friday, and Germany’s DAX sank 3.1%. Both have been global leveraged speculating community darlings. Crude was hammered 4.2% Friday, with commodities indices down about 2%. Notably, the Brazilian real was trading at 3.83 (to the dollar) prior to the Fed announcement, before sinking 3% to a multi-year low by Friday’s close. Reminiscent of recent market troubles, financial stocks led U.S. equities lower on Friday. Financials badly underperformed for the week, with Banks down 2.7% and the Securities Broker/Dealers sinking 2.6%.

The market deck has been reshuffled for next week. A lot of market hedging took place during the past month of market instability. And a decent amount of this protection expired (worthless) with Friday’s quarterly “triple witch” options expiration. This means that if the market resumes its downward trajectory next week many players will be scampering again to buy market “insurance.” This creates market vulnerability to another “flash crash” panic “risk off” episode.

I am not predicting the market comes unglued next week. But I am saying that an unsound marketplace is again vulnerable to selling begetting selling – and another liquidity-disappearing act. Bullish sentiment rebounded quickly following the August market scare. The bear market will be well on its way if August lows are broken. I’m sticking with the view that uncertainties are so great – especially in the currencies – the leveraged players need to pare back risk. And the harsh reality is that central bank policymaking is the root cause of today’s extraordinary uncertainties and market instability.

In closing, I’m compelled to counter the conventional view that the Fed should stick longer at zero because there is essentially no cost in waiting. I believe there are huge costs associated with thwarting the market adjustment process. Measures that contravene more gradual risk market declines only raise the likelihood of eventual market dislocation and panic. This was one of many lessons that should have been heeded from the 2007/2008 experience.

 

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Sat, 09/19/2015 - 19:18 | 6570131 gatorengineer
gatorengineer's picture

The face melting vix short squeeze still looms...  The market I believe will only become more disjoint from reality.  If they can hold china green or to minimal loss Sunday night then monday will be a face melter up

Sat, 09/19/2015 - 19:24 | 6570143 Atomizer
Atomizer's picture

As stated before, pull VIX and TRIN off the indicator scale. Wach the muppets trade as blind mice. The same happened when LIBOR occurred. 

Sat, 09/19/2015 - 19:29 | 6570148 cossack55
cossack55's picture

"what CBs might try next?"  WAR. Works every time. Why did WW1 not end sooner? Everyone knew the loser would shoulder the DEBT

Sat, 09/19/2015 - 19:40 | 6570160 El Vaquero
El Vaquero's picture

If I had to take a SWAG, I'd guess that the market doesn't totally tank until somebody big enough declares bankruptcy and the daisy chain of BS financial products gets broken.  This shit is manipulated, and will continue to be manipulated until something breaks it. 

Sat, 09/19/2015 - 20:42 | 6570251 kev the bev
kev the bev's picture

Yep, I agree El V, It`s going to be a bit like the snowball going down the hill getting larger and larger as the selling accelerates.

Sat, 09/19/2015 - 22:19 | 6570465 Implied Violins
Implied Violins's picture

Yup. And they will choose what breaks, where it breaks, and when. And NONE of the resultant losses will be theirs.

Sat, 09/19/2015 - 22:34 | 6570504 WOAR
WOAR's picture

But how do you go bankrupt when you get bailed out?

Sat, 09/19/2015 - 20:50 | 6570266 MalteseFalcon
MalteseFalcon's picture

Same story in WWII.  Europe and Japan got a generation of austerity.  US got a few years of financial repression.

Who is going to get stuck with the austerity?

Sat, 09/19/2015 - 20:19 | 6570222 Josh Galt
Josh Galt's picture

... and it's gone! 5 Commercial US Banks shrink the OTC derivatives market by $40 trillion in just two quarters.  QE4 - 40 to the rescue??

https://www.youtube.com/watch?v=jiVzn1aCF5g
Sat, 09/19/2015 - 19:20 | 6570134 Atomizer
Atomizer's picture

Dark pool trading will be compelled to get confused. Winks

Sat, 09/19/2015 - 19:22 | 6570140 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.

Sat, 09/19/2015 - 21:41 | 6570378 DirkDiggler11
DirkDiggler11's picture

BOA - Bankrupt Of America ?

I would rather ask a mime that is hopped up on meth for financial advice that the BOA "advisors". Not only are they poor criminals, they get caught all of the time, they suck as financial advisors / analysts as well.

Sat, 09/19/2015 - 19:25 | 6570144 alfbell
alfbell's picture

 

 

We're on a runaway train and nobody gets off until we hit the end of the line (iron wall).

Sat, 09/19/2015 - 19:26 | 6570145 cynicalskeptic
cynicalskeptic's picture

The people I know  (the ones with any amount of intelligence) still on Wall Street are EXPECTING it to all blow up worse than 07-08..... One )in securities law) is absolutely astounded that nobody's been charged much less gone to jail.. "the lesson learned is that you get to keep profits - maybe paying a fine if you're caught doing something really illegal - and government will make good your losses... it's like being at a casino  - where you get to keep any winnings - AND you're cheating -all while playing with other people's money"

Sat, 09/19/2015 - 19:45 | 6570168 Syameimaru
Syameimaru's picture

Anyone who's watching has to know that the next bubble burst is going to be bigger than 08. You don't have to be a ZH reader to know that. You don't even have to have any money invested.

Sat, 09/19/2015 - 20:18 | 6570219 yogibear
yogibear's picture

"is absolutely astounded that nobody's been charged much less gone to jail.."

Gone to jail? Only if if your some poor trading chump and the SEC is nudged off their porn viewing to make their prosecution for the year. 

The big financial criminals are rewarded by the Just-Us department and the Federal Reserve to steal even more wealth.

Sat, 09/19/2015 - 19:29 | 6570147 Yen Cross
Yen Cross's picture

 Central banks are fractured at the / monetary seam. like the fabric, of fine clothing they pretend to ware/wear.

  Has anyone taken the time to look at reverse repos? Has anyone taken the time to look at reverse[OIS] swap rates? [eurodollar]

I think reducing interest on excess reserves is briliant!

 Seriously? Banks have been posting record profits and are still liquidating employees, and using "one time" Non-GAAP accounting principles?

 The United Banana Republic of Amerika, is finished. There's no MOAR paper promises, for you Illegal peoples.

 Welcome to reality! You'll get nothing and "like it".

Sat, 09/19/2015 - 19:42 | 6570163 Atomizer
Atomizer's picture

Non-GAAP is the new normal. What will be crystal clear, FX dispersing money to other shell entities to hide monetary structural deterioration. The bedrock foundation of SDR experiment. 

Sat, 09/19/2015 - 19:53 | 6570177 Yen Cross
Yen Cross's picture

 I'll catch some Flakmeister. ha [Global warming is real before]

 SDR isn't ever going to happen. Unless it's backed by 200+ percent paper to actual "deliverable" mined gold, negotiated at a 200% premium.

 Keep stacking!

Sat, 09/19/2015 - 20:23 | 6570228 ThirteenthFloor
ThirteenthFloor's picture

Yen + 1. FRB needed to slow rise of dollar. Therefore no rate increase. The reverse repos are broken, next is currency breaks and last last is equities.

Look at Yen pop up late Friday for a hint of Sunday/Mondays action.

USSA will not steal Syrian 150 tons gold either after Russia came in last week.

Things accelerating.

Sat, 09/19/2015 - 19:36 | 6570156 WTFRLY
WTFRLY's picture

Simon Says - NYSE freeze

Hokey Pokey - Black Monday

Musical chairs - ??? Find a chair to sit in.

Sat, 09/19/2015 - 19:42 | 6570164 Soul Glow
Soul Glow's picture

The fiat con game is hilarious.  The dollar is dead, long live the yuan <---- stupid meme.  Back it with gold and it still must be audited, and who should do the audit?  A central bank?

Down with central banks, bring back sound money.

Sat, 09/19/2015 - 22:18 | 6570461 Tyrone Shoelaces
Tyrone Shoelaces's picture

Rice and blowjobs will always have value.  The rest of it you can haggle about.

 

 

Sun, 09/20/2015 - 11:42 | 6571351 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

In Japan, rice, & blowjobs, have decreased in value to the point that blowjobs are now on sale at reduced prices, and rice must be checked with a Geiger Counter.

Sat, 09/19/2015 - 19:44 | 6570165 PoasterToaster
PoasterToaster's picture

There's only one thing left to do...

GET TO DA CHOPPA

Sat, 09/19/2015 - 19:44 | 6570166 CHoward
CHoward's picture

Except for materialzing 'money' out of thin air and hiking interest rates - WHAT OTHER TOOLS DOES THE FEDERAL RESERVE HAVE?!  Yellen is always yapping about all the "tools" at their disposal - what fucking tools?

Sat, 09/19/2015 - 22:06 | 6570440 sodbuster
sodbuster's picture

Yellen IS a tool.

Sun, 09/20/2015 - 08:30 | 6571021 Boomberg
Boomberg's picture

The NIRP tool as posted not long ago on ZH. Hoarding cash outside the system will have to be made illegal. 

Sat, 09/19/2015 - 20:45 | 6570171 cowdiddly
cowdiddly's picture

It used to be that the Feds supposed job was to cushion/soften the blows of the business cycle

Then it became a dual mandate of growth and maximum employment, where a somehow mystical 2% inflation was the perfect utopia and the theft was small enough that nobody notices

Under Greenspan (Mr. Bubble) free markets and our crooked buddies would regulate themselves and you have no business looking at our derivative book. The Fed then moved into directly supporting asset prices like real estate and markets causing predictable bubbles in both.

We have just entered a brand new Fed age where first under Berskanke we support global institutions

 Amd NOW Granny windbag tells us this meeting we now have to be accomadative to global market conditions and more ZIRP. As if all would be good at the same time? GET REAL

All This whole exercise in string pushing futility has caused is something of a giant sine wave of greater and greater amplitude were the busts get bigger and bigger and the massive recoveries are taking longer.

 wave one 1987 Big bust fast recovery

 2nd sine wave-The dot com even bigger bust Ok recovery

3rd wave The housing bust Huge bust and we still can find a footing.

Fucking with the Money or string pushing, only and always just causes the money to move to where it is most wanted or profitable. Which is where we find ourselves now . All stuck at the big banks, on the Fed balance sheet, and massive amounts hidden in the derivative markets.

But most of all, The Debt to allow this money is on the Governrment's balance sheet and a debt saturated consumer that cant take on any more. No amount of printing will make the consumer corporations or the government any more solvent than they are today. Unless you go intraveinous now that you have a drug addicted junkie of an economy and inject it straight into a vein. Or in other words, give a fat check directly to the consumer which we know will never happen being how distasteful that idea would be to the bankster mob getting their free money gig horned in on.

Accomodation is now a permanent fixture, not for the people, but now must protect the Governments Debt BOMB first and foremost or that little full faith and fucking idea of the USD goes up in a vapid smoke.

The Feds only real mandate now besides legalized theft is to keep this DEBT BOMB  from going NUCLEAR taking out everything in its path. So drop the charade about global markets Granny, you don't have the gunpowder to shoot what is already on your plate.

The Sine Wave have outgrown even you. YOU CANT BEAT EXPONENTiAL.Its time to end your FED while we still can or this will take everything down in global economic devastation or war. You are no longer doing humanity ANY FAVOR to pretend and continue and the whole world knows it, watching in terror at US actions. ITS  NOW THE HARD CHOICE from your intervention and fraud.

sorry about long rant and bad grammar- from the hip and heart

 

Sat, 09/19/2015 - 19:52 | 6570176 Scooby Dooby Doo
Scooby Dooby Doo's picture

"Central Banks Have Shot Their Wad"

Has anyone given any thought to Janet being a squirter?

Sat, 09/19/2015 - 20:00 | 6570196 Joebloinvestor
Joebloinvestor's picture

How can they shoot their wad in a fiat system?

Sat, 09/19/2015 - 20:14 | 6570215 JoeySandwiches
JoeySandwiches's picture

Because fiat systems rely on confidence. The market tumbling the way it did after no chage in interest rate showed a potentially massive loss of confidence.

Sat, 09/19/2015 - 21:08 | 6570300 Joebloinvestor
Joebloinvestor's picture

Is that why it is called a "confidence game"?

In a pm based system you have to have confidence that the keepers/owners are telling the truth or have the ability to quickly verify.

The "cashless" society and bitcoin acceptance is IMO just a validation of the fiat system with specimens representing value because the governments who fucking run most everything are scared shitless of ever being held accountable.

 

Sat, 09/19/2015 - 23:30 | 6570605 khnum
khnum's picture

Penn and teller or Chris Angel are brilliant magicians but if you had to watched their shows for 7 years straight you would eventually figure out the smoke and mirrors to many acts,the market manipulators have just pulled the same stunts so many times that even the stupid are figuring out the markets aren't real,so yes confidence is reducing.

Sat, 09/19/2015 - 20:09 | 6570211 polo007
polo007's picture

According to VTB Capital:

http://is.gd/ibCddR

The Federal Open Market Committee (FOMC) Is Boxed-in

The Federal Open Market Committee (FOMC) decided to leave monetary policy on hold at the conclusion of its two-day meeting yesterday. Although the fed futures market had only given a 28% probability to a 25bp hike in the target range for the fed funds rate, there was still nervous anticipation over the FOMC’s intentions. In an ‘ideal world’, the FOMC would telegraph its intentions well in advance, make it crystal clear why it was raising interest rates so that when the actual announcement came, markets would react calmly.

That’s the theory. In practice, the FOMC had not communicated its intentions well and, as a result, there was a lot of speculation over whether they would raise rates by 25bp, 12.5bp and economists talking about a ‘hawkish hold’ or ‘dovish hold’ or would the FOMC raise rates just once (‘one and done’) and wrap it all up in a very dovish message that future rate hikes would be very gradual. As a result, investors faced a dizzying set of permutations and combinations with economists almost tying themselves up in knots over a relatively tiny move in the fed funds rate when in the real world, commercial borrowers and households face much higher and quite variable rates of interest.

Our view was that whatever the FOMC decided to do, the ultra-cautious nature of Janet Yellen and most of her colleagues was bound to result in a dovish outcome for financial markets. Markets have become highly dependent on every utterance from Fed officials for the simple reason that the markets have been pumped up by super-accommodative policies which have resulted in excessive risk-taking and high levels of leverage. The markets need the Fed to keep the life-support machine on. US equity market valuations are at historical extremes while corporate earnings and sales growth decline. S&P500 companies are incentivised through the Fed’s cheap money policy to spend its cash mountain on buying back its own stock rather than investing in fixed assets. Markets have become distorted and increasingly dis-connected from economic fundamentals.

Our view that we have articulated in our research through the course of this year is that the Fed has kept interest rates too low for too long. A monetary policy designed for emergency conditions back in 2007-2008 is no longer necessary. It is not as though the US economy is in a depression or that the US banking system is on its knees. “Unconventional” monetary policies are no longer necessary. Indeed, the FOMC’s latest set of economic forecasts upgraded its GDP projections for this year to a central tendency of 2.0-2.3% which actually is the long-term average growth rate of the US economy and lowered its forecast of the US unemployment rate for this year to 5.0% from 5.3%. In the last 50 years, the US unemployment rate has actually been very rarely below the 5.0% level (the 1960s, late 1990s and just prior to the 2007 crisis). The Fed should have started to ‘normalise’ monetary policy a lot earlier in this cycle.  Now as the FOMC acknowledged in its statement, “international developments” are a key factor in its thinking.

“International developments” is code for China. The FOMC, by delaying the decision to raise rates and finding every excuse to delay, has now found itself at the mercy of external events. The collapse in the Chinese equity market, the worries about a ‘hard landing’ for the Chinese economy and the ‘mini-devaluation’ of the currency on 11 August are all things the FOMC cannot control. In the past, China did not matter for the Fed’s deliberations. Now China does matter.

A Chinese economic slowdown will affect the global economy and increase the risk of a ‘Made in China’ global recession. In addition, China is exporting deflation as a result of the massive over-investment made in recent years which is now redundant and resulting in the slump in commodity prices. These deflationary pressures affect the global economy and help explain the downward pressure in government bond yields in the major markets.

The twist for the US Treasury market, where China is the largest official holder of US Treasuries, is that the beginnings of a decline in China’s fx reserves is also corresponding to a decline in the holdings of US Treasuries. At the moment this is not necessarily a problem for the US Treasury as the US budget deficit as a percentage of GDP has fallen sharply from a peak of 10% in 2009 to 2.5% currently. If anything it is Chinese deflationary price pressure which is pushing US bond yields lower.  So worries of some form of Chinese ‘Quantitative Tightening’ (QT) looks over-stated.

All of this presents a dilemma for the Fed. Having ‘missed the boat’ in normalising monetary policy, the door seems to be closing for future US interest rate increases. In the aftermath of yesterday’s FOMC decision, the fed futures market is giving just an 18% probability to a 25bp rate hike at the 28 October FOMC meeting and a 34% probability to a move at the 16 December meeting. The FOMC itself has lowered by 25bp its projections of the median fed funds rate increase though 2018: the FOMC sees the fed funds rate rising to 3.5%. This seems very over-stated. Global recession risks and a US economic ‘expansion’ that is long in the tooth suggest that the peak in the fed funds rate in this cycle will be a lot lower than 3.5%. In an extreme scenario where a global recession and/or financial crisis rules out interest rate increases completely then we go back to ‘square one’ with the Fed left with no option but to implement ‘QE4-ever’.

Whether more QE is the answer is very debatable as even the research findings of the St Louis Fed questioned the impact of QE on the real economy. At some stage, the channel of a reduction in long-term rates in creating any sort of stimulus must exhaust itself in the same way that at the zero bound in terms of short term official interest rates, the conditions of a liquidity trap exist. In this world, the next suggestion from economic theorists would be ‘helicopter money’ or in the UK, ‘QE for the people’ as advocated by the new Labour leader, Jeremy Corbyn. This is really moving into uncharted and potentially dangerous territory.

In the short term, the FOMC’s decision to do nothing does not remove the endless speculation over their intentions, which, on occasion, spark unnecessary market volatility. Mohamed El-Erian in the FT today warns that the Fed “risks finding itself in a cul de sac that, in itself, would risk transforming it from a volatility suppression machine to being a source of financial and economic instability”. Against a background of still high debt levels in the major economies as well as the massive credit expansion in China, the risk is also that monetary policy becomes ineffective. Central banks would then be in danger of losing credibility as investors wonder what comes next. Global deflation, global recession and a bursting of the credit bubble financed by the Fed’s ultra-easy monetary policy would all be a hard price to pay.

Sat, 09/19/2015 - 20:34 | 6570240 yogibear
yogibear's picture

 "bursting of the credit bubble financed by the Fed’s ultra-easy monetary policy would all be a hard price to pay."

Have to expect bank and market holidays if that occurs.


Sat, 09/19/2015 - 20:45 | 6570254 Farmer Joe in B...
Farmer Joe in Brooklyn's picture

Is anyone else getting blue balls waiting for tomorrow's open...??

Sun, 09/20/2015 - 08:45 | 6571036 Eyeroller
Eyeroller's picture

That's the problem... EVERYBODY is expecting a crash tomorrow, and that surely means a massive short squeeze. (And I would love nothing more than to be wrong about this!)

Sat, 09/19/2015 - 21:05 | 6570293 Grandad Grumps
Grandad Grumps's picture

Horseshit. You are a globalist shill.

Sat, 09/19/2015 - 21:09 | 6570302 polo007
polo007's picture

http://www.bloomberg.com/news/articles/2015-09-19/fed-officials-make-cas...

Fed Officials Make Case for 2015 Liftoff After September Hold

by Jeanna Smialek, Steve Matthews and Matthew Boesler

September 19, 2015 — 6:44 PM EDT

Three Federal Reserve policy makers argued on Saturday for lifting the central bank’s key interest rate before year-end, countering bets by many traders that the Fed will wait until 2016.

Laying out their rationale for a rate increase at one of the Fed’s two remaining meetings of 2015, the central bankers cited continued improvement in the domestic economy, including low unemployment, which they suggested overshadowed concerns about global conditions and volatile financial markets.

San Francisco Federal Reserve Bank President John Williams, St. Louis Fed President James Bullard and Richmond Fed President Jeffrey Lacker each spoke or wrote on Saturday, days after the policy-setting Federal Open Market Committee voted on Thursday to leave rates unchanged.

The central bank’s decision, and the way its deliberations were framed, were interpreted by many Fed watchers as a sign that the central bank might not raise rates this year. In holding rates steady, the Fed noted international uncertainties and subdued inflation.

“It was a close call in my mind, in part reflecting the conflicting signals we’re getting,” Williams said of the decision during a speech in Armonk, New York. “I view the next appropriate step as gradually raising interest rates, most likely starting sometime later this year.”

According to Fed meeting materials, 13 of 17 policy makers still expect rates to increase in 2015. The Committee gathers next on Oct. 27-28 and again Dec. 15-16. The Fed’s policy interest rate has been near zero since 2008.

Despite the FOMC projection for a rate increase this year, traders now say it’s more likely than not that the Fed will postpone liftoff until 2016, based on the current pricing of federal funds futures contracts.

‘Argued Against’

While Williams voted to leave rates near zero, Bullard, who does not vote on policy until next year, argued in favor of a rate increase at the meeting, he said Saturday during a speech in Nashville, Tennessee.

“I argued against the decision,” Bullard said. Holding rates steady yet again seems to have “created rather than reduced global macroeconomic uncertainty,” he said.

The FOMC’s goals have “essentially been met, but the Committee’s policy settings remain stuck in emergency mode,” Bullard said.

The Fed’s twin objectives for its monetary policy are to achieve maximum employment and stable inflation, which it targets at 2 percent. The unemployment rate dipped to 5.1 percent in August. Williams said he expects the U.S. to reach full employment by the end of this year or early in 2016. By contrast, inflation remains subdued, with the Fed’s preferred indicator at just 0.3 percent.

Upward Pressure

“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the committee said in its post-meeting statement.

Even with a small interest rate increase, policy will remain highly accommodative and continue to place upward pressure on inflation, Bullard said Saturday. Williams said that while a strong dollar and the fall in oil prices over the past year have tamped down price pressures, those factors “should prove transitory.” He expects that inflation will move toward 2 percent in the next two years.

Lacker, an anti-inflation hawk, dissented in favor of higher interest rates on Thursday. He said Saturday that the Fed’s failure to tighten had raised the risk of “adverse outcomes.”

“An increase in our interest rate target is needed, given current economic conditions and the medium-term outlook,” Lacker said in a statement posted on his regional bank’s website. Lacker was the sole dissenter to the Fed’s decision.

‘Close Call’

Both Williams and Bullard said October is a possibility for an interest rate increase, even though there will be relatively limited economic data -- including one jobs report and one Consumer Price Index reading -- between now and then.

“There is not a lot of data,” Bullard said in a question and answer session with reporters. “On the other hand, it was a close call at this meeting.” The Fed is “ready to go” in October if conditions warrant, he said.

Although traders are leaning against a Fed move for now, if markets don’t properly anticipate a rate increase when it arrives, “that doesn’t bother me,” Williams told reporters.

Sat, 09/19/2015 - 21:24 | 6570331 q99x2
q99x2's picture

Print

Sat, 09/19/2015 - 21:53 | 6570407 polo007
polo007's picture

http://video.cnbc.com/gallery/?video=3000420214

Forget rate hike, Fed will do more QE: Expert  

Sunday, September 13, 2015 7:36 PM ET

A weakening U.S. economy, alongside the crisis in China, means that the Fed will launch another round of quantitative easing, says Richard Duncan, chief economist at Blackhorse Asset Management.

Sat, 09/19/2015 - 22:19 | 6570466 ElectroGravitic
ElectroGravitic's picture

A little guidance on what the Fed may do next:

Joe Rogan Experience #331 - Dr. Steven Greer
https://youtu.be/0gVLv5eg4Xg?t=5093

Sat, 09/19/2015 - 23:44 | 6570629 DOGGONE
DOGGONE's picture

Here is the Real Dow to date:
http://showrealhist.com/RealDow.gif
Please predict its future ...

Sun, 09/20/2015 - 00:47 | 6570718 Clowns on Acid
Clowns on Acid's picture

Ok, we know all this. When does the Fed get audited then put on trial ?

Sun, 09/20/2015 - 04:05 | 6570848 polo007
polo007's picture

http://www.reuters.com/article/2015/09/18/japan-economy-boj-idUSL4N11O1W...

BOJ brainstorms stimulus overhaul as options dwindle -sources

* BOJ QQE programme buying 80 tln yen govt bonds a year

* Senior BOJ officials discuss longer-term options -sources

* BOJ could revamp QQE in longer term -sources

* QQE not intended to last another 5-10 yrs -source

* Concern that BOJ may run out of sellers of govt bonds

By Leika Kihara

TOKYO, Sept 18 (Reuters) - Sources say the Bank of Japan has been quietly brainstorming the idea of overhauling its massive monetary stimulus programme over time, casting doubt on officials' confident assertions that it can keep buying up government bonds for several more years.

Sources familiar with the BOJ's thinking say stepping up its 80 trillion yen ($665 billion) per year asset buying remains its go-to option if deflationary pressures persist, given a limited arsenal of obvious policy alternatives.

But they say the central bank isn't ruling out breaking with the money-printing programme over the longer term, as it has had little success in accelerating inflation toward its 2 percent target since it began in April 2013.

Senior BOJ officials have been involved in preliminary talks discussing the longer-term options, the sources said.

"If the medicine isn't working, you wonder whether it makes sense to keep prescribing more," one of them said on condition of anonymity.

Another source quoted a senior BOJ official as saying that if the so-called quantitative and qualitative easing (QQE) programme fails to accelerate inflation for too long, a revamp of the framework may become an option.

"QQE is not a programme intended to last another five, 10 years," said a former BOJ policymaker with knowledge of current monetary policy deliberations.

The BOJ has pumped 180 trillion yen into the economy since adopting QQE and each month gobbles up government bonds equivalent to about 1 percent of Japan's GDP.

While the stimulus has boosted exporters' profits by weakening the yen, its broader impact has been weak as firms remain wary of increasing wages and investment.

Inflation has ground to a halt on falling oil costs and soft consumption, rekindling market expectations the BOJ might step up easing as early as next month.

But with borrowing costs near zero, some BOJ officials doubt whether expanding QQE would help the economy much and some worry they might eventually run out of sellers if they accelerate the programme.

The BOJ already holds about a quarter of Japanese government bonds (JGB) in the market, and that would rise to nearly 40 percent by the end of 2016 at the current pace of buying.

BOJ technocrats say they can keep buying as long as they offer high prices, but BOJ board member Takehiro Sato, a former bond analyst, has argued that there are limits because financial institutions need a certain level of JGBs for collateral.

The International Monetary Fund agrees.

"Given the pace of the BOJ's purchases under the QQE program that is under way ... you could run out of willing sellers of JGBs by the end of 2017," said Kalpana Kochhar, the IMF's mission chief for Japan.

That would not just make the bond market dysfunctional, it would also prevent the bank from hitting its monetary base target.

REVERT TO RATE TARGET?

For now, there is no consensus within the BOJ on what any overhaul to the programme might look like. Many policymakers still cling to hope that inflation will rise enough to allow them to consider phasing out QQE around 2017.

But with a sales tax hike looming that year, many analysts doubt the BOJ can withdraw stimulus so soon.

If the BOJ bumps into trouble buying JGBs, some analysts say it could abandon the 0.1 percent interest the central bank pays on reserves the financial institutions park in BOJ accounts, or even charge a fee for them. That might particularly hurt regional banks, which are already struggling with thin margins on bond investments.

"The BOJ can combine this step with an increase of risky asset purchases and call it a new version of QQE," said Ryutaro Kono, chief Japan economist at BNP Paribas, who was once considered a candidate to fill a BOJ board vacancy.

"That would effectively mean shifting the BOJ's target to interest rates from the volume of money."

BOJ Governor Haruhiko Kuroda has ruled out the idea as it would make it hard to achieve the BOJ's base money target by discouraging banks from depositing funds with it.

But he also said that in Europe, negative interest rates had had essentially the same effect as QQE in pushing down yields across the curve.

The IMF's Kochhar said cutting the 0.1 percent interest could be one way to "get the money out the door".

"The BOJ has told us while nothing is ruled out, they would watch carefully the European Central Bank's experience."

Sun, 09/20/2015 - 04:56 | 6570871 Batman11
Batman11's picture

All the Central Banks work has done nothing for the real economy.

Cheap oil = collapsing global economy

Low commidity prices = lack of demand for raw materials from which real things are made

Central Banks can prop up stock markets (for now) but eventually reality will set in.

Maintaining the penthouse suite while the foundations are crumbling.

More Central Banker insanity.

 

 

Sun, 09/20/2015 - 06:48 | 6570927 pops
pops's picture

 

"Central Banks Have Shot Their Wad & The MarkeD Deck Has Been Reshuffled"

There.  Fixed that headline for you.

Sun, 09/20/2015 - 08:39 | 6571033 Phillyguy
Phillyguy's picture
Equity markets are driven by several factors- stability, greed and fear. The price of equities is a function of buying and selling pressure. As stock prices rise, buying pressure increases as more people want to profit from a stock’s appreciation. When the stock prices reaches a peak, selling pressure increases and investors want to lock in prices (profit taking). Some stocks, such as the “blue chips” have traditionally are perceived as “stable” and thus bought and held by institutional investors, mutual funds, etc for relatively long periods of time with the rationale they will continue paying dividends and/or appreciating in a predictable manner. QE has completely distorted this. Capital always seeks maximal rate of return and the $ Trillions injected into the world economy by the US FED, ECB and BOJ have gone into the stock market, real estate ($30 million dollar house just sold in Palo Alto to new Google CFO) and caused disruptions in emerging market economies. Despite this taxpayer funded financial largess, the global financial picture remains precarious- commodity prices have tanked due to slack demand (stagnation), unemployment is high in Japan, EU and US (>90% of “new” jobs in US are temp positions- low pay, no benefits or job security) and deficits continue to rise. Large corporations have used this ultra-cheap money for stock buy-backs (reduces number of outstanding shares increasing stock price), rather than investing in new plants and equipment and creating new good paying jobs. Indeed, wages for working people in the US have been stagnant/declined since 2000, while assets of the highest income groups have grown exponentially.

 

This begs a fundamental question- what has QE done to equity markets? It has made traders nervous, manifesting itself as market “volatility”. Just last week, the DOW lost 100 pts Monday, went up circa 400 Tues/Wed (500 pt swing in 3 days) and then lost 100 pts thurs (intra-day swing almost 300 pts) and lost almost 300 pts Fri. What to make of this? 1. No one knows what the true “value” of equities is anymore, because prices have been distorted/inflated with QE. 2. Prices are being shot up by buying pressure (usually on low volume; i.e., greed) and then the prices collapses, as we saw Thurs and Fri of last week, due to fear that these stocks are overvalued and will fall in value- profit taking. We are in for a lot more market volatility.
Sun, 09/20/2015 - 10:12 | 6571152 RaceToTheBottom
RaceToTheBottom's picture

QE to infinity and then beyond.

 

It works for them

Sun, 09/20/2015 - 12:53 | 6571540 polo007
polo007's picture

http://news.goldseek.com/GoldSeek/1442494200.php

Try making up for a past mistake and make another? That’s playing from behind, if you will, and it’s not out of the question if you know the Fed’s history:

1. Not a single post-war recession has been predicted by the Fed a year in advance, according to former U.S. Treasury Secretary Lawrence Summers; and

2. Neither of the last three recessions were recognized until they were already under way.

Incompetent or ulterior motives for policy?

Regardless, here we are with expectations ramped up for a rate hike, as the rest of the world is easing.

What’s notable for investors is that since the 2008 crash, we have not been able to achieve new market highs without central bank stimulus. Full stop.

But it’s only a quarter point…

According to a study released by McKinsey Global Institute in February of this year, global debt has increased by $57 trillion USD since 2008. With such an enormous amount liquidity in the system (M1 money supply near lifetime highs) financial markets are increasingly becoming nothing more than a currency game; and the currency game is a relative one. I print, you print, they print, but who’s printing more and where is capital flowing in and out of? Within this context, a quarter-point rate hike would be much more than simply symbolic.

As we have seen since late 2012, the rise in the U.S. dollar has had major implications on global markets, whether it be currencies, commodities or interest rates. A rate hike would equate to further USD strength and will accelerate the deflationary spiral we have witnessed over the past few years. Raising rates into a slowdown could also place the U.S. firmly on a path to recession in 2016.

Conversely, no rate increase does not meet the expectations set by the Fed and will re-inflate commodities in the immediate term. Arguably, it pulls forward the possibility of QE4 as well.

So it seems the Fed finds itself in a self-imposed conundrum here: make a policy error and raise into a slowdown, don’t raise and openly recognize growth is slowing. Which brings me back to my previous point: since 2008, no new market highs have been achieved without central bank stimulus.

As always, government remains the No. 1 risk to financial markets, and I will change my views as the facts change.

“The Federal Reserve is not currently forecasting a recession.” – Ben Bernanke (January 2008)

Sun, 09/20/2015 - 14:59 | 6571920 Professorlocknload
Professorlocknload's picture

If "This time it's different" considerations are set aside, unlike before, this time around, the Fed has been granted full consent to do "Whatever it takes" to generate economic growth . Including going full on Red Capitalist, ala China,,,if that's what it takes.

Even this crisis won't be allowed to go to waste.

Way I see it, this is far from over, and we will see massive WPA/New Deal style boondoggles, such as bridges to nowhere, empty cities, dams in the deserts etc. Even wars will be escalated in the process. A bust here would spell victory for liberty and free markets and defeat for the State. This is why it's unlikely to happen, short of the odd "Told you so" scare tactic orchestrated by those in power.

It's all about control, and since 9/11, Liberty has been traded for Security. Moral Hazard?

Sun, 09/20/2015 - 15:15 | 6571974 polo007
polo007's picture

http://www.bloomberg.com/news/articles/2015-09-20/fed-officials-still-se...

Fed Officials Still See 2015 Liftoff Despite September Delay

By Jeanna Smialek and Sarah McGregor

September 20, 2015 — 1:23 PM EDT

- Williams: September FOMC policy decision was a `close call'

- Jobless rate expected to keep falling, inflation to rebound

Federal Reserve officials argued that an interest-rate increase is still warranted this year, laying out the case for liftoff in remarks over the weekend that counter bets by traders that the central bank will stay on hold until 2016.

Three policy makers separately explained their rationale for enacting a rate increase at one of the Fed’s two remaining meetings of 2015, citing declines in unemployment and other gains in the U.S. economy that should outweigh headwinds from slower growth abroad and turbulent financial markets.

San Francisco Fed President John Williams, a policy centrist who has worked closely with Chair Janet Yellen, said Sunday that “in my mind, it was a close call” to delay a rate rise at last week’s Federal Open Market Committee meeting.

Williams’ comments on Fox News Channel’s “Sunday Morning Futures with Maria Bartiromo” echoed remarks he made the day before, and chimed with the reasoning of St. Louis Fed President James Bullard and Richmond Fed President Jeffrey Lacker. Both weighed in on Saturday over the FOMC’s vote to leave rates near zero.

Mixed Messages

The central bank’s decision, and the way its deliberations were framed by Yellen in a post-meeting press conference, were interpreted by many Fed watchers as a sign that the central bank might not raise rates this year. In holding rates steady, the Fed noted international uncertainties and subdued inflation.

Traders say it’s more likely than not that the Fed will postpone liftoff until 2016, based on the current pricing of federal funds futures contracts.

Investors will hear directly from Yellen again on Sept. 24 when she delivers a speech in Amherst, Massachusetts.

Williams said on Saturday in Armonk, New York, that “I view the next appropriate step as gradually raising interest rates, most likely starting sometime later this year.”

He is in the majority. Quarterly Fed forecasts, which were updated for last week’s FOMC, showed that 13 of 17 policy makers still expect rates to increase in 2015. The projections, displayed in a so-called dot plot, don’t identify the forecasts of individual policy makers and Yellen declined last week to say which dot belonged to her.

The committee gathers next on October 27-28 and December 15-16. Its benchmark interest rate has been kept near zero since 2008 to spur hiring and investment amid the worst recession since the Great Depression. The Fed last raised rates in 2006.

2016 Liftoff

While Williams voted last week to leave rates near zero, Bullard, who doesn’t vote on policy until next year, argued for an increase at the meeting, he said Saturday during a speech in Nashville, Tennessee.

Holding rates steady yet again seems to have “created rather than reduced global macroeconomic uncertainty,” he said.

The FOMC’s goals have “essentially been met, but the committee’s policy settings remain stuck in emergency mode,” Bullard said.

The Fed’s twin objectives for its monetary policy are to achieve maximum employment and stable inflation, which it targets at 2 percent. The unemployment rate dipped to 5.1 percent in August. The Fed’s preferred gauge of price pressures rose 0.3 percent in the 12 months through July and has been under two percent for more than three years.

Williams said he expects the U.S. to reach full employment by the end of this year or early in 2016.

Upward Pressure

“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the committee said in its post-meeting statement.

Even with a small interest-rate increase, policy will remain highly accommodative and continue to place upward pressure on inflation, Bullard said Saturday. Williams said that while a strong dollar and the fall in oil prices over the past year have tamped down price pressures, those factors “should prove transitory.” He expects that inflation will move toward 2 percent in the next two years.

Lacker, an anti-inflation hawk, dissented in favor of higher interest rates on Thursday. He said Saturday that the Fed’s failure to tighten had raised the risk of “adverse outcomes.”

“An increase in our interest rate target is needed, given current economic conditions and the medium-term outlook,” Lacker said in a statement posted on his regional bank’s website. Lacker was the sole dissenter to the Fed’s decision.

‘Close Call’

Both Williams and Bullard said October is a possibility for an rate increase, even though there will be a relatively limited amount of new economic data -- including one jobs report and one Consumer Price Index reading -- between now and then.

“There is not a lot of data,” Bullard told reporters. “On the other hand, it was a close call at this meeting.” The Fed is “ready to go” in October if conditions warrant, he said.

Although traders are leaning against a Fed move for now, if markets don’t properly anticipate a rate increase when it arrives, “that doesn’t bother me,” Williams told reporters.

He said in his Fox News interview on Sunday that the Fed could stage a press briefing after its meeting next month if it decided to act. Yellen, who has said a rate decision is possible at any meeting, is not scheduled to hold a press conference until the December FOMC.

Sun, 09/20/2015 - 17:20 | 6572312 polo007
polo007's picture

http://www.reuters.com/article/2015/09/19/us-usa-fed-idUSKCN0RJ0VH20150919

A divided Fed pits world's woes against domestic growth

NASHVILLE, Tenn | By Howard Schneider and Jonathan Spicer

Federal Reserve policymakers appeared deeply divided on Saturday over how seriously problems in the world economy will effect the U.S., a fracture that may be difficult for Fed Chair Janet Yellen to mend as she guides the central bank's debate over whether to hike interest rates.

Though last week's decision to again delay an interest rate increase was near-unanimous, drawing only one dissent, St. Louis Fed President James Bullard called the session "pressure-packed" as members debated whether global uncertainty or the continued strength of the U.S. economy deserved more attention.

In the end the committee felt that tepid global demand, a possible weakening of inflation measures, and recent market volatility warranted waiting to see how that might impact the U.S.

Bullard, who does not have a vote this year on the Fed's main policy-setting committee, said he would have joined Richmond Fed President Jeffrey Lacker's dissent, and worried the central bank had paid too much attention to recent financial market gyrations.

Markets sold off sharply this summer over concerns about a slowdown in China and weak world growth, leaving Fed officials to vet whether that reflected a short-term correction or more fundamental problems on the horizon.

"Financial markets tend to wax and wane, sometimes suddenly. Monetary policy needs to be more stable," said Bullard, who in prepared remarks here to the Community Bankers Association of Illinois said he did not think the Fed "provided a satisfactory answer" to why rates should stay near zero.

The economy is near full employment, and inflation will almost certainly rise, Bullard said, leaving the Fed's near seven-year stay at near zero rates out of line with the broad economic picture.

In a statement Lacker said he felt the current low rates "are unlikely to be appropriate for an economy with persistently strong consumption growth and tightening labor markets."

However at least for now the Fed set aside such concerns out of deference to a different worry: that a weak global economy may pull down the U.S. Specifically Fed officials, including Yellen, said a dip in measures of inflation expectations was worrisome if it proves to reflect eroding confidence in the recovery.

The expectations of businesses and consumers about inflation is thought to play an important role in the actual pace of price increases, as well as in decisions about savings, investment and consumption that are central to economic growth.

San Francisco Fed President John Williams in remarks on Saturday laid out the case for caution, and suggested he and others now want more proof before a rate hike. Williams said he still expects rates will rise this year as the "disinflationary" impact of low oil prices and other outside influences fades, and the U.S. economy continues to expand.

Still, "getting some more clarity around what is really happening in the global economy, how is that affecting the U.S. economy, and also seeing continued progress in the U.S. economy -- these are all things I'm watching," Williams told reporters when asked about a possible rate rise in October.

Williams, who is among the regional bank presidents who does vote on interest rates this year, declined to specify whether he sees October or December as the appropriate time to go.

The Fed next meets in October and again in December.

Thirteen of 17 Fed members last week said they still expect to hike rates this year.

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