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The Simple Explanation Why There Is No Such Thing As A "Dovish Rate Hike"
Among the many consensus expectations from Yellen tomorrow is that the Chairwoman - while hiking rates by 25 bps - will cushion the announcement in extensive language explaining why this is the most dovish rate hike in history, a message which will likely be conveyed by a decline in slope of the Fed's "dots", suggesting fewer hikes over the next year.
However, that is a problem and as Deutsche Bank explains there is really no such thing as a "dovish rate hike." Here is DB's Dominic Konstam:
The Fed is “right”
The Fed is “right” to be raising rates. If they had done it earlier all the problems they now have to face, they wouldn’t have had to. If they do it later, those same problems will be even worse. Of course had they done it earlier there may well have been other problems. Like for example, no growth and a much higher unemployment rate. But that’s all water under the bridge. Fact is this Fed is ready to go. And markets know it!
So first things first. What is the Fed about to do? It appears the IOER will be set at 50 bps and the Fed will signal a higher corridor for the Funds rate, presumably 25-50 bps. We expect the overnight reverse repo rate (RRP) announcement will be in a contemporaneous statement from the FOMC, in an “implementation note”. The market arbitrages the IOER to the Funds rate (banks/other banks/GSEs) and IOER to the RRP rate (banks/money market funds). Capital constraints and FDIC insurance limit the perfect arbitrage such that the IOER should be the ceiling (50 bps) and the RRP rate (25 bps) should be the floor. The expectation is that the Funds rate will settle in the middle of the range, perhaps biased slightly lower, assuming a “less strong” arbitrage between banks and the Funds market. With that in mind the Fed might be tempted to set a higher repo rate e.g. 30 bps but then it wouldn’t make sense to have the lower end of the Funds range below that i.e. the Fed would then announce a range for Funds between 30-50 bps. More likely the Fed will be prepared to drain more liquidity for a 25 bps repo rate, perhaps initially up to $600 billion over night (double current overnight). This can obviously rise a lot and they have suggested they could suspend it. The Fed could also add term-deposits.
The next issue is what the Fed does with their dots. Last week we highlighted our view that the Fed is unlikely to drop the median dots at least for 2016 and 2017. This partly reflects the difficulty of at least two or three key voters moving together compared with say 2018 where the median is defined by one. But fundamentally it reflects the logic that in their model-driven minds the unemployment data and inflation outlook has evolved in a positive way since September and there is no need to adjust the dots. The doves almost certainly will lower their dots but this will not impact the median, only the mean. Moreover given the objective of beginning to remove accommodation is, at least for the median, to scale back credit “largesse” – in Yellen’s own words, it is better to move earlier than later when the consequences for the economy may otherwise be a deeper downturn – it doesn’t make much sense to go out of their way to appease the market.
The summary:
For those who think Fed hikes are “good” for economic confidence, it would also be odd for the Fed to suggest, implicitly via a lowering of the dots that things were not quite so rosy. On balance the Fed therefore looks set for effectively “insisting” on their median dots – closer to a hawkish rather than dovish hike.
That said, even DB notes that since not even the Fed has any idea what will happen, then clearly nobody else does either:
So sit back, relax enjoy the ride. A new regime is upon us. The next phase in the great escape from the financial crisis is about to begin!
Good luck, and as a quick reminder, this is what happened when Japan tried the same "great escape" in 2000...
... and the US, back in 1936 smack in the middle of the Great Depression when like now, it thought the economy was strong enough to sustain a tightening.
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All interest rates are Usury. Look at the Bible or Koran. Money should not beget money.
You've just been reprogrammed by the Talmudists, and "We're all financial Talmudists now".
I've always found this fascinating, that the word of 'God' says not to charge interest if you are interested in a fair and equitable socioeconomic system.
Silly people. Fair and equitable is not what the self proclaimed human 'gods' have in mind.
This is the real news of the day...
http://www.theguardian.com/world/2015/dec/15/there-is-no-nazi-gold-train...
nice. let the conspiracy theories begin!
The bible, just as any other religious paper, was only construed as to enslave and dominate the common people.
Therefore any assumptions made therein about "interest" and "usury" are highly negligible. Pricing risk through interest is nothing evil just because you might not understand how it works exactly. The bible just wants you to stay ignorant and dumb, so the rulers can go about their banking business while you plow the fields.
If everyone knew how interest rates and basic financial instruments worked, the ruling elite would have a hard time justifying the currently ongoing shitshow they call monetary policy (QE, NIRP)
Kirk, since when are you in the business of mentioning the Bible or Koran? btw, it's customary to quote verse by verse, when you do this kind of stuff
"...why this is the most dovish rate hike in history, a message... "
Tyler Durden, for once you are not scornful enough. the first hike upward is the hardest. and it was a reason for the "baby steps" of ancient Greenspan times, among others
Gary North
''The Bible is clear on three legal principles: (1) monetary debasement is wrong (Isaiah 1:22); (2) multiple indebtedness, which is the basis of fractional reserve banking, must not be allowed (Exodus 22:26) ; (3) weights and measures must not be tampered with (Lev. 19:36). All three are violated by modern economic policy.''
http://www.garynorth.com/public/512.cfm
LOL. You're right, I'm not in the business of putting much stock in either set of ancient texts. Especially since I've never read the latter.
My (too subtle?) point was, that since so many people of both 'faiths' (~3 billion) do claim to believe or seek to follow it, that they'd want to adhere to its teachings.
As for what is and is not Usury... I think that a country's Central Bank should (a) be nationalized, and (b) issue Currency/Money that is debt-free to banks. The banks themselves and all private lenders downstream should have hard limits on interest rates that may be charged, with said Limits in the single digits. If a prospect's risk profile is too high, they simply should not be loaned anything at all, rather than ignoring the risk and whacking them with punitive/usurious interest rates. After all, getting a Loan is an earned privilege that is based on pure merit, and not a birthright.
In spite of my mild sarcasm/irony, I do believe "We've all become Financial Talmudists", in the sense that we accept high interest rates (Usury) as "normal".
'hard limits on interest rates that may be charged, with said Limits in the single digits'
big difference btw debt-free money and interest free credit.......I dont believe that there should be any interest attached to 'currency created ex-nihilo'...
repayment extinguishes debt money and would also extinguish currency that was created 'interest free'
read this
https://realcurrencies.wordpress.com/2013/10/11/the-difference-between-d...
"After all, getting a Loan is an earned privilege that is based on pure merit, and not a birthright."
While this is true, the complexity of what goes into merit is completely outside the capability of a govt or "national" entity which you propose. And included in a person's birthright is the free use of their capital with voluntary people, which you also propose to infringe.
Some wild examples of complex schemes that can't be legislated against in your proposed national system are, perhaps a loan is made with an agreement of some payment in kind for extra interest, like charging the hypothetical max nationally approved interest rate of 9%, and another 10% is paid with labor for the less credit worthy. Or paying extra interest with loyalty or tax schemes to the banking family or political family. In any case, the amount of interest and the endless amount of complex scheming that would be invented to deal with "national" price controls on money would end up being more dangerous than letting interest rate fluctuate naturally.
My examples are wild, but are examples of outside-the-box thinking that would go on.
Imo the best thing to do is remove any protection from money lenders. Let the free market and societal ostracism take care of it.
Perhaps, but it is very important for everyone to perform real work and in the real world of businsess it is also important to accurately price risk. Collateral, value, and risk are essential to innovation you dumb fuck.
If money is fucking "free" (involves no real work in it's "creation") they why the fuck should bankers and financiers be the only people with access to that cash you stupid fuck.
Carpenters, farmers scientists, engineers are doing the actual fucking work you moron. Let them print the money, fuck the useless paper-pushers! Bankers and financiers are in fact nothing but middlemen between the computer/printer (with modern money is created) and the producer/consumer in the real economy. Fuck em.
See the real problem yet?
You do realize that by advocating that you are literally advocating for ZIRP, just applied to everyone, right?
Forbidding someone to lend something that is theirs in exchange for future production because >muh Jebus said so is A) fucking retarded and B) destroys the economy. Indeed, that is exactly how the Jews became so powerful. They were allowed to lend money while Christians weren't, ie the Jews were allowed to practice capitalism while everyone else was forced to wallow in the filth of feudalism.
Now if you were to call central banking "financial Talmudism" I would agree with you.
You, like many, have known that global Weimar is in fact inevitable.
Hedge accordingly, it's all any of can really do anyway.
The U.S.S.A. is NOT Japan. Remember, the velocity of a dead currency is in fact zero.
The FFR is largely irrelevant now.
okay class. did the retards out there get that bit in yellow? some of you people are getting on my fucking nerves with your repetitive moronic drivel. get off the short bus and take a look around once in awhile before you start spouting crap off your keyboards saying rates are correlated and shit and other derivative "facts" you pulled out of your collective asses.
I second that. recently I have the impression that most of the comments are bordering the idiotic more then the insane or the unhinged. somebody let the dogs out? I mean, the monkeys in?
Sure, why not, free money for all. Personally, I look forward to the bank paying me to take out a billion dollar loan. Sounds great me.
Yes, idiotic indeed!!!!
You cannot answer the question "Will she hike?" unless you know if she is actually able to hike.
No one has convincingly demonstrated that she has that ability.
And as someone posted a few days ago, covertly the rate hike mechanism (if it exists) should already have been deployed (test run).
The worse possible outcome for the Fed would be to announce a rate hike and then have rates stay unchanged or - GASP - go down.
"The worse possible outcome for the Fed would be to announce a rate hike and then have rates stay unchanged" --This has already happened, several times. No point being "data dependent" when you keep moving the goal post. The truth is that the "black budget" is already exploding. Liabilities have not stopped growing exponentially.
That which cannot be sustained, won't be, period.
Time to thin the fucking herd.
Same as it ever was....
"This has already happened, several times."
There is a difference between announcing an intention to hike and announcing a hike.
Bullshit. The Fed has in fact been jawboning for 100+ years. Several other examples throughout their history. Like I said, time to thin the herd. Same as it ever was.
Italian Bank Runs
http://us8.campaign-archive1.com/?u=d6f020f3bd6a1e2c4eb254e6c&id=c6d9a4cece&e=2c1099c972
The Italian banking system is in serious trouble, and the failure of these four banks is simply the tip of the iceberg. An Italian pensioner committed suicide this week. He hung himself after the Italian government’s rescue of small four banks wiped out his life savings. The bailout was carried out under the principles which governed Cyprus’ bailout. All of the stakeholders in the bank, including depositors, were at risk in the banks’ failure. These were small banks, so the reality of what was happening did not strike home immediately. This man’s suicide did. Italian consumer protection groups, Adusbef and Codacons, have demanded a criminal investigation into the case. This suicide and subsequent reaction by consumer defense groups mark the first glimmer of growing public concern over the security of bank deposits in Italy. As tensions grow between Italy and the EU over the country's banking system, as well as the Italian government and domestic public pressure, conditions will come closer to realizing Geopolitical Future’s 2016 forecast of a banking crisis in Italy.In a free market, the market determines the rates of bonds and the prices of stocks. But since we have a completely controlled market, the federal reserve is playing the role of price discovery... and I mean playing.
What keeps bond rates from going up today? Simple. The federal reserve has been buying US bonds dumped onto the market to keep the rates from rising. If nobody bought the bonds, their prices would drop and the rates rise. That is the direct open market way.
Instead, they are pretending this is not happening and that they control the rates from the front end. Well, now they do, in this fascist system. They will announce rates as if they scribe everything in stone, and then they will continue to buy market dumps to maintain that rate.
What keeps bond rates from going up today? Simple. The federal reserve has been buying US bonds dumped onto the market to keep the rates from rising. If nobody bought the bonds, their prices would drop and the rates rise. That is the direct open market way.
i'm going to have to disagree with you there. I would argue that the fed is actually preventing us treasury yields from falling with their policies.
"I would argue that the fed is actually preventing us treasury yields from falling with their policies."
If this is indeed the case, are they doing this intentionally or unintentionally?
you are both arguing about prices, aren't you? what if the fundamental problem is a lack of buyers, regardless of the price?
we all know that volume is half of what it used to be.
I pulled up a 15 year chart of ORCL today.
volume is pathetic. and in a low volume market, the big swinging dick can push it where he wants it.
For most assets there will be knife catchers in the markets. The central banks are propping asset and equities prices by up to 100%. There is little risk priced in these days. With risk the yields would double or triple
If the fed is preventing rates from falling, this means they are also preventing the prices of bonds from rising. Do you think there is a demand for bonds driving prices up? If so, why is the fed buying them up? And buying them off the market would increase scarcity, further driving prices up.
Your logic is sound to a point. I hope this addresses one of the questions above as well. imo the fed's goal has been to drive investors out of treasurys and into bullshit stocks and junk bonds. during qe they did this by actually buying the treasurys. now they are keeping the bid under garbage with zirp fueled speculation.
however...
if there were no zirp and were no qe then bullshit stocks and junk bonds would have crashed, creating a strong demand for treasurys ala japan circa 2000 - 2010. There would have been no commodity glut, inflation would have stayed low, and the huge malinvestment bubble never would have happened (which will eventually lead to nirp and more qe which will in turn actually make things worse and will cause uncle sam to pay higher rates than otherwise). imo treasury rates will go lower, but not because of the fed, rather in spite of it.
So the FED has lost (or will lose) control of interest rates?
Not for Treasury bonds. They can buy up as many as they are told to. It will be the corporate bonds that get hit along with the junk bonds. The market will determine prices for things outside the federal reserve realm.
Buzz is correct that the flood of easy money has driven the stocks into a crazed upward spiral of cocaine-frenzied madness. I am not sure about how much that took money away from bonds. Stocks sure took on a more attractive speculative image even as the PEs skyrocketed. I don't see a threat of market shifts from stocks to bonds any time soon, but enough of a rate rise could begin to draw those looking for a safe haven. Either way, the fed has so many skinny fingers in these markets that fundamental and technical guessing is almost worthless.... until the reckoning.
"The market will determine prices for things outside the federal reserve realm."
If this is true, then the FED must be willing and prepared to accept a meltdown in this realm. In junk bonds, at least, it is inevitable (if not then eventually it will be corporate balance sheets killed by USD strength).
not necessarily. they will go full retard eventually and buy them all ala japan 2015 someday. they don't necessarily want to crash treasurys they just want to fix the price so it continues on the present trajectory.
I just got a call from upper management at the bank to get a report of all our variable rate loans ready. They are chomping at the bit for the rate increase.
If they - the big asset managers - want a rate hike to be bullish, it will be bullish. they control the market, they control the thinking.
thus it has always been. until it comes up and bites them in the ass.
until it does, therefore, it will be bullish.
have to change the thinking. have to divorce myself (yourself) from the real, actual reality.
until it bites them in the ass, which it seems to do about every 10 years.
It can only be bullish short term because interest expense will hit the financials and stoch buybacks