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"Policy Mistake"

Tyler Durden's picture




 

When it comes to the Fed's current "data dependent" thinking and what it may or may not do in the coming months, there is absolutely no agreement among the experts: it may or may not hike in December, or it may or may not hike in the 2016 election year.

There is, however, agreement on two things: its recent "communication policy" has been a total disaster as Pedro da Costa explained recently from his new perch at Foreign Policy magazine; and when looking at the corner the Fed has painted itself into, the consensus is summarized with two simple words: "policy mistake", as the following chart showing the appearance of these two words in Bloomberg news stories confirms.

 

And here is BNP with the best explanation why:

The market took the FOMC statement as hawkish. There were two key reasons:

  1. The first was removing “recent global and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term”.
  2. The second was saying, “in determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress – both realized and expected – towards its objective of maximum employment and 2 percent inflation.”

The way we read the first change is that Chair Yellen overplayed the China card in the last press conference and that the events referred to in September are no longer ‘recent”, not that global developments are not significant, since the Fed is still “monitoring global economic and financial developments.”

The second is a clear attempt to stop the market from pricing out December (eg, in response to soft GDP data tomorrow, which the Fed will have had in hand for Wednesday’s meeting) in case the weak recent payrolls look to be a flash-in-the-pan. Our assessment is that December is still not likely (our subjective probability climbed back up to 35%). The Fed has given it an adrenalin shot to keep December’s hopes going, but the patient‘s chances look far from promising, since the vital signs in the economy are fading.

What the market ignored was that the Fed no longer says growth “is” expanding at a moderate pace, but that it “has been”. Clearly the message is things have changed. The assessment of the labor market was also revised down.

The Fed wants us to believe that it did not go in June and September, when the economy had a stronger pulse than it does now, but it is really seriously considering December. So much for data dependence. To us, this seems to compound the Fed’s recent communication challenges and also threatens to combine this with a serious policy mistake. We don’t believe Chair Yellen will go along with this in the end, but the probability of a mis-step seems to have risen, to roughly a 50% chance in the market’s eyes.

The shift in wording to a more hawkish stance, when the data have softened, carries dangers for a Fed already criticized for its communication policy. If the incoming data are half decent (say payrolls 40,000 or so better in October than September) the Fed may have painted itself into a corner, where it has to hike or its credibility is severely damaged, even though the broader data are weakening. This would only make sense if the Fed was convinced the recent economic weakness was truly transitory. Alternatively, it may be the Fed thinks “it’s now or never” and sees the danger of a prolonged soft patch that could lock it out for a considerable period – maybe until we are uncomfortably close to the presidential election.

 

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Thu, 10/29/2015 - 08:26 | 6725447 XAU XAG
XAU XAG's picture

maybe until we are uncomfortably close to the puppet election.

 

Fify

Thu, 10/29/2015 - 08:32 | 6725454 Cognitive Dissonance
Cognitive Dissonance's picture

'Policy Mistake' implies an error made in an otherwise sane and functioning system. Wrong, wrong, wrong. Everything is a mistake in a dysfuctional system, some more than others.

Thu, 10/29/2015 - 08:38 | 6725494 Arnold
Arnold's picture

Every step is into dogshit.

Thu, 10/29/2015 - 08:53 | 6725554 XAU XAG
XAU XAG's picture

Arnold

 

"Who let the Dogs out" ?

 

or In as the case maybe?

Thu, 10/29/2015 - 09:01 | 6725592 two hoots
two hoots's picture

We are beyond mistake and well into consequences.

Thu, 10/29/2015 - 09:11 | 6725628 RiverRoad
RiverRoad's picture

The Fed has been pulling a "Penelope" weaving and unweaving the rug.  Who do they think they're kidding??

Thu, 10/29/2015 - 08:32 | 6725468 XAU XAG
XAU XAG's picture

When playing with a huge chemistry set ...............and has a printing press.............any "policy Mistakes" can be printed away.

Thu, 10/29/2015 - 08:38 | 6725495 negative rates
negative rates's picture

Talk about a soft landing.

Thu, 10/29/2015 - 08:56 | 6725557 FireBrander
FireBrander's picture

Raising rates has the potential to be disastrous for "us", but it would improve the FED's image with its peers; whom, recently, have not so quietly, and publicly, voiced their opinion that the FED may be out of "tools"...

A .25% increase would show the world the FED "knows what it is doing and is in full control" of the "recovery".

Defend the FED's image, or protect the "people's" economic well being...choices, choices...

 

Thu, 10/29/2015 - 11:02 | 6726146 slaughterer
slaughterer's picture

How important is a mistake that results in a transitory decrease of 0.25% in ES mini futures?

Thu, 10/29/2015 - 08:30 | 6725461 mijev
mijev's picture

First it was QE I, then QE II, then QE III. The next iteration will be QE I.V. in more ways than one.

Thu, 10/29/2015 - 08:39 | 6725499 negative rates
negative rates's picture

They better hurry up cause the Feds about to default and take QE with it.

Thu, 10/29/2015 - 08:50 | 6725541 Ghordius
Ghordius's picture

you might want to count yourself lucky. here, we have just one: Q€ as long as Yellen raises rates. now that's a steady policy, isn't it?

Thu, 10/29/2015 - 08:35 | 6725477 taopraxis
taopraxis's picture

Oh, what a tangled web...

Thu, 10/29/2015 - 08:37 | 6725493 Wow72
Wow72's picture

Exactly and it only gets worse from here

Thu, 10/29/2015 - 08:36 | 6725481 Mick Shrimpton
Mick Shrimpton's picture

Rates will be hiked in January 2017, IF a Republican is elected.

Thu, 10/29/2015 - 09:04 | 6725585 FireBrander
FireBrander's picture

The FED may raise rates strictly for show; but voluntarily raising rates back to any "historical norm" would be an absolute economic, social, political, calamity...who's going to push that button?...NO ONE..."Unforseen Forces" will push the button.

And once "Unforseen Forces" force the FED to raise against it's will, the FED will lay blame exactly where it belongs...on anyone but the FED.

Thu, 10/29/2015 - 08:38 | 6725497 casey13
casey13's picture

They have to pretend they are going to hike but they never will.

Thu, 10/29/2015 - 08:46 | 6725522 buzzsaw99
buzzsaw99's picture

it will always be something. well, the xmas shopping numbers were a bit soft... well, it has been a cold winter... well, the election is around the corner...

the fed responded to a (fed induced) bursting bubble by blowing the biggest bubble in history. there is no way out except a slow death by MOAR BITCHEZ.

Thu, 10/29/2015 - 14:00 | 6725578 SSRI Junkie
SSRI Junkie's picture

.

Thu, 10/29/2015 - 08:59 | 6725584 Seal
Seal's picture

Maybe it's not the Fed in charge

Thu, 10/29/2015 - 09:06 | 6725607 lunaticfringe
lunaticfringe's picture

The only policy tool the FED has left is bullshit. I've been hearing rate hike chatter for two and a half years since May of 2013.

If there is one thing I am thoroughly sick of by now- it is hearing and reading rate hike bullshit for the past 900 days. Either bring it or STFU Janet.

Thu, 10/29/2015 - 09:50 | 6725810 Government need...
Government needs you to pay taxes's picture

Looking down the road, I'm going to bet on the US starting a really big war, and using that as an excuse to confiscate productive assets and guns, as well as enslave, errr 'mobilize' the populace.

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