PIMCO Lashes Out At "Flip-Flopping" Fed: 'Stop Focusing On The Stock Market'

Tyler Durden's picture

We truly live in interesting times: what was once tinfoil conspiracy theory, namely that the Fed is entirely focused on propping up the stock market, has become not only mainstream thought, but overnight in a scathing essay by prominent PIMCO economists, including Mihir Worah, PIMCO blasted the Fed for constantly "flip-flopping", and telling Janet Yellen that "the Fed should focus on rising wages, not the stock market.

Of course, the Fed's traditional response is a well-rehearsed one: record stock prices will eventually "trickle down" into higher wages. Yes, it has not happened so far in the past 7 years of unorthodox monetary policies, but the Fed is absolutely confident it will eventually... just not yet.

But going back to the punchline, what is most amazing is that we now live in a day and age, when the world's biggest bond fund managers is telling the Fed to stop reacting to every downtick in the market, and actually regain some of its credibility. To wit:

The Fed’s periodic hinting at possible hikes followed by no hikes (with one exception) has many market observers believing the Fed has become myopically focused on the vagaries of the stock market, almost to the point where it ignores most other indicators of economic health. So with a strong payroll number today and the S&P 500 modestly higher on the year, people fear the Fed will once again start talking up the likelihood of a rate hike. Most bond market participants agree this would be a hawkish mistake; hence short-term Treasury yields have moved higher, while the 30-year is moving lower.

The good news for "market observers" is that they are allowed to do just that: observe. To everyone else who can participate in a centrally-planned economy in which the planner no longer knows how to communicate or has any idea if it is responding to the economy or the market, good luck.

Here is Pimco's full note:

Will The Fed Flip-Flop Again On Economic Data?


The U.S. Treasury yield curve had an interesting reaction to today’s blockbuster payrolls data. June saw 287,000 U.S. jobs created, more than making up for May’s dismal 38,000 number and leaving the six-month average at 172,000 jobs created per month. Normally one would expect data like today’s to steepen the yield curve with longer rates selling off more than shorter rates as inflation expectations rise and term premium comes back into a yield curve that is too flat by most historical measures. Instead two-year rates have moved higher and 30-year rates have moved lower! In addition to the oft-cited global factors, we feel there are two related reasons for this unusual price action:

  1. The yield curve is so flat in the first place because the market discounts the Federal Reserve’s desire to reach its inflation target of 2.0% for the PCE index. (Personal Consumption Expenditures is the Fed’s preferred inflation measure; 2.0% PCE corresponds to about 2.35% CPI (Consumer Price Index.)) U.S. inflation has been persistently below target, and yet, since 2013 and the quantitative easing “taper tantrum,” the Fed has been periodically threatening to raise rates, then backing away. As we have repeatedly argued regarding inflation targeting, the Fed needs to be credible in its desire to raise inflation and inflation expectations – otherwise we run the very real risk of the U.S. economy getting into a Japan-like situation in which the Fed tries to raise inflation expectations, even by raising its inflation target, and people just ignore it.
  2. The Fed’s periodic hinting at possible hikes followed by no hikes (with one exception) has many market observers believing the Fed has become myopically focused on the vagaries of the stock market, almost to the point where it ignores most other indicators of economic health. So with a strong payroll number today and the S&P 500 modestly higher on the year, people fear the Fed will once again start talking up the likelihood of a rate hike. Most bond market participants agree this would be a hawkish mistake; hence short-term Treasury yields have moved higher, while the 30-year is moving lower.


The Fed should measure U.S. economic success not in terms of a higher stock market, which benefits mostly the wealthy, but in rising wages. One market indicator of this would be a re-steepening of the yield curve as term premiums and inflation expectations move toward normal levels. The futures market anticipates overnight rates for this cycle peaking at 2% or even lower; a healthier environment would have rates peaking at 3% in line with the Fed’s own expectations. Similarly, 30-year inflation expectations (as signaled by the Treasury Inflation-Protected Securities (TIPS) market) above 2.0%, rather than the current 1.6%, would indicate the Fed is regaining its credibility in terms of reaching its target, despite being below that target for most of the last 10 years.

The Fed needs to be clear and consistent on its objectives (and its desire to meet both aspects of its dual job and price stability mandate), rather than reacting to every twist and turn of the stock markets and high frequency data.

And just to address Pimco's (rhetorical?) question, the answer is: yes.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
FreeShitter's picture

The fed only cares about the fed and the fed is the "market".

Dizzy Malscience's picture

It’s the only ammo they have left..  phony Fed money for the illusion of growth.

booboo's picture

what? and let all their worthless assets deflate? The horror.

Dizzy Malscience's picture

“It’s the only ammo they have left..  phony Fed money for the illusion of growth.”


Oops, I forgot about the bogus government statistics and all their lies and misrepresentations.

Arnold's picture

Having to write another bad quarterly report there, Pimmy?

Not that I disagree with your rant.

MalteseFalcon's picture

The FED's focus consists of, in order:

1.  The $ and gold.

2.  Stock market.

3.  Other major currencies.

4.  Foreign stock markets

5.  Global trade level

5.  U.S. Inflation.

6.  U.S. Main street economy

7.  U.S. employment.


DavidC's picture

Indeed. If the Fed was populated by people who had real world experience instead of academic fuckwits they wouldn't be hammering savers and pension funds and would let the market sort itself out - short term pain for long term gain instead of a Japan Schrodinger cat state of neither alive nor dead.


Harlequin001's picture

If we had gold in money, they couldn't do any of this anyway.

It's the only way to stop political corruption and war; stop them printing money.

Gold in money is not bitcoin; gold in money is everything. It will keep your children alive.

1stepcloser's picture

They broke the housing ATM...so they had to create the stock market ATM machine.   

SomethingSomethingDarkSide's picture

Looks like they shoulda kept Billy ol' boy..

Son of Loki's picture

"Jobless Recovery" is Soweto's Legacy.

xyzcracker's picture

Government parasites never had it so good.

E.F. Mutton's picture

Stop focusing on the Stock Market?

That's not what her owners want, you need to talk to them.  Try Haifa.

1stepcloser's picture

BTW...how does the Fed focus on rising wages, when globalism steadly reduces them...  

Arnold's picture

Two "Bingo"s given in one day.

I am getting too generous or you are getting more insightful.

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Jul 12, 2016 10:03 AM

I will enjoy reading about how they think a rate hike was not possible in their July meeting -__-

sessinpo's picture

People at pimco are morons. The stock market is all the fsb has. Everything is a failure and even the stock market hasn't done shit in 8 years.

pimco should be saying, get on with the reset. all markets are screwed and so is the economy.

el mago's picture
el mago (not verified) Jul 12, 2016 10:08 AM

All you need to know is the zionist FED has bailed out the banks again and you, American goy, is going to pay for it! 

The Ram's picture

'The FED should focus on rising wages?'  Huh?  I don't see rising wages outside of the 'C' suite.  How about the 'The FED should focus on raising real wages.'  Now you have a policy worth implementing since it is likely to help the middle class.

SheepDog-One's picture

Real wages and standard of living hasn't had an increase in 15-20 years, if anything they've dropped...where's the 'middle class' now?

conraddobler's picture

The FED only cares about utterly crushing the spirit of humanity for all eternity and they are on plan nothing to see here, move along.


Erek's picture

How in the hell can wages rise if there are no jobs in the first place? Oh, I see. Wages for the Chinese and Vietnamese.

SheepDog-One's picture

Am I really supposed to believe PIMCO really doesn't get it? Come on....

NDXTrader's picture

It's not flip-flopping, it's politics. You think it is a coincidence we are at all-time highs right before the Republican convention so networks can constantly trumpet that as Trump says the economy is shitty? Let Trump get elected and see how much the Fed cares about the stock market

Seasmoke's picture

Dow 36,000. Get to work Mr. Yellen. 


PIMCO is just as much of a hypocrite as the Federal Reserve, but each gets their largesse from a different income stream. The FEDsters only care about their bottom line in terms of corporatism. Rising wages will not help the overall system of corruption in banking if the stock market is not propped up continually by Mr. Yellen et al. As soon as the stock market shows signs of a crash everyone, and their brothers, will head for the doors. This much is known by the FEDsters, and they don't give a hang about 'wages', or 'rising wages' because that is NOT on the agenda, and PIMCO bloody well knows it. Moreover, when the worldwide banking cartel crashes out so too will PIMCO because they are systematically linked to the corruption, and largesse.

Pareto's picture

Pimco just wants the FED to look at something different - and control it.  Same shit, different mechanism.  Just another lobby for a different kind of state sponsored central bank socialism.

nakki's picture

Centralized Consolidation through Confiscation via Counterfeiting. CB can print fiat buy up the worlds corporations ultimately owning everything under the sun. They own the politicians, the own the debt that the corporations use for buybacks, they own sovereign debt and they own the "printing" press.


NumberNone's picture

What a bunch whiny bitches.  Like anyone really gives a shit that they can't make money in the current environment.  Government at every level face severely underfunded pensions.  You let the air out of the market and these governments will have to address this with bailouts or reduced payments.  Much easier to do a sleight of hand and inflate the market with invisible money then all is right in the world.  Pimco better wake the fuck up and understand that this market is going not going to correct any time soon.  

carbonmutant's picture

Janet's hidden name is Lucy... and your name is Charlie Brown

undercover brother's picture

Everyone knows the Fed is "myopically" focused on the stock market and has been for years.   They've talked about their two mandates, which no one knows how they got in the first place, and they constantly mention the stock markets in almost every comment, which has quietly become their third mandate.  They do business with and speak to hedge funds and banks and run their own HFT programs.  Pimco's comments, while appreciated, are late and likely won't amount to anything.  

MajorFall's picture

interesting how not a peep of jawboning saying that the market is not prepared for interest rate rises...

TheRideNeverEnds's picture

Sounds like someone failed to BTFD.

Cmon pimco, it's not hard, there are grade school children more successful than you these days using this simple strategy to print their own money using the e-minis. If they go down, buy them. If they go up, buy them, if they go sideways, you guessed it, buy them!

There is no way central banks stop printing money, inflating assets is literally their stated goal.

Colonel Klink's picture

Yes, please stop focusing on the stock market and focus on the bond market so we can make more money.


Thautikus's picture

I thought PIMCO was a professional Bond Fund, et al financial managers.

Obviously I was wrong.

The Fed is trapped, raising short term rates would flatten the yield curve even more and would trigger a world wide banking collapse almost immediately.

US Stock markets would tank leaving no refuge for hot money flows.

The US Government deficit would explode higher as Operation Twist forced multiple trillions into maturities of less than 1 year.


But go ahead PIMCO, demand higher short term rates.

RMolineaux's picture

Why would a flattening yield curve cause system collapse?  Because the hotshot crap-shooters at JPM and Deutsche have expanded the interest rate derivatives into monstrous numbers.  This was a decision by the banks, not the Fed.  Let the too-bigs fail - that is the only way to rectify the situation. 

dmger14's picture

Riddle me this, batmen.  With interest rates at all time lows, and having to stay low to keep countries from blowing up, why can't PE and PB ratios rise and remain high going forward?  In a ZIRP world and with PPT and central banks buying even stocks, wouldn't it be expected that prices would rise going forward even with diminishing earnings?  I am not in stocks, but wouldn't be surprised if they are held high for a long time, considering that the entire system may be at stake if they are not.

RMolineaux's picture

In my opinion, it is overstating the case to assert that the Fed reacts to every twist and turn of the stock market.  Rather, it is caught between its desire to maintain full employment, while at the same time avoiding the public discouragement that would come from a more precise description of the current economic climate.  A more accurate description of the current economic climate would have to acknowledge slow growth, limited capital investment by corporations, and destructive game-playing on Wall Street.  It is the continuing program by corporate managements to buy back shares and increase dividends, instead of making new capital investments, that blocks overall growth and increased employment. These are not Fed decisions, but rather a case of short-term pocket-stuffing by corporate oligarchs.

hxc's picture

None of that has anything to do with zirp, right? Fuckin economic illiterate

gregga777's picture

Anything that Feral Reserve members or mouthpieces say is totally meaningless. Janet Yellen could recite Lewis Carroll's Jabberwocky in testimony before Congress to the same result. The only thing that matters is what the Feral Reserve does which is entirely geared towards transferring the wealth of American workers to the money changers. The Feral Reserve does not care in the least that 23% of American workers are unemployed or that the annual inflation rate is north of 7.5%. The Feral Reserve's only goal is increasing American income and wealth inequality in favor of the money changers. Keynesianism is useful only for the Feral Reserve's narrative smokescreen and means less than Jabberwocky.

Dan'l's picture

The Fed has screwed anyone that has saved money and was depending on bond yields to supplement their income. Smellin' Yellin' doesn't care. She's a bonehead academic that has a head filled with goofy models that bear no resemblance to reality.  F U Yellin!

Bopper09's picture

I AM the stock market.

- J Yellen