Goldman Asks If Yellen Has Lost Control Of The Market, Warns Of Fed "Policy Shock"

Tyler Durden's picture

Just hours after the Fed's March "dovish" rate hike, when stocks paradoxically surged to all time highs and yields tumbled, Goldman found something strange: "surprisingly, financial markets took the meeting as a large dovish surprise—the third-largest at an FOMC meeting since 2000 outside the financial crisis, based on the co-movement of different asset prices." Even more surprising is that according to Goldman, its financial conditions index, "eased sharply, by the equivalent of almost one full cut in the federal funds rate." In other words, the Fed's 0.25% rate hike had the same effect as a 0.25% race cut!

Goldman's Jan Hatzius then went on to note that this was "almost certainly not" the desired outcome that Janet Yellen had been going after, and that markets had in fact misread the Fed's tightening intentions. The Goldman chief economist then asked rhetorically "how will the committee respond to this potentially undesired move" and answered "at the margin, it will likely make them more inclined to tighten policy. Using today’s estimated close, our FCI impulse model now implies a boost of about ½pp to real GDP growth in 2017, from a starting point of roughly full employment and inflation close to the target. So further FCI easing implies at least some risk of economic overheating—which in turn would increase the risk of recession further down the road. We expect the committee to lean against such an easing over time."

Nearly two months later, with stocks at new all time highs, and financial conditions even easier than they were the first time Goldman warned that the market had misread the Fed's intentions, Goldman goes back to this most sensitive of topics and writes that despite two rate hikes and indications of impending balance sheet runoff, financial conditions have continued to ease over the past six months.

Despite two rate hikes and indications of impending balance sheet runoff, financial conditions have continued to loosen in recent months. Our financial conditions index is now about 50bp below its November 2016 average and near the easiest levels of the past two years.

Hatzius then asks if - in not so many words - the Fed has lost control of the market, or if the Fed will simply have to punish the market with a "monetary policy shock" to make it clear that the Fed demands tighter conditions to delay the next recession. To wit:

Does this mean that 1) monetary policy has lost its ability to affect financial conditions or 2) Fed officials just need to deliver more rate hikes if they want to bring about an FCI tightening?

According to Hatzius, "the answer is 2)" and that the Fed has not lost control of the market just yet. Which brings up another question:

If the Fed retains its ability to steer financial conditions, why have financial conditions eased recently despite ongoing hikes? The answer is that Fed policy—especially Fed policy communicated around FOMC meetings—only accounts for a relatively small part of the ups and downs of financial conditions. And other developments such as the sharp pickup in global growth have been helpful for US financial conditions by boosting risk assets while keeping the US dollar from appreciating sharply in response to higher short-term interest rates. While it is difficult to say whether future non-monetary policy shocks will be positive or negative for US financial conditions, our finding that the impact of Fed policy on financial conditions remains (at least) similar to the longer-term average suggests that Fed officials should be able to achieve their goals for financial conditions by moving the funds rate if they try hard enough.


Fed Policy Retains Sizable Impact

What Goldman really meant to say is that the Fed's 50 bps in rate hikes since December have been drowned and offset by the trillions in new credit created out of China. That credit expansion is now ending however, and China's credit impulse has tumbled into negative territory (but that's a different topic).

Going back to Goldman, Hatzius adds that "we find that the sensitivity of financial conditions to monetary policy shocks has been quite high recently, at least when we identify these shocks using bond market moves around FOMC meetings. This suggests that the easing of financial conditions is due to other factors, most obviously the improved global environment, not reduced traction of monetary policy."

What form will this monetary tightening "shock" take place? "

Our best (though uncertain) answer is that the committee will need to deliver 50-75bp more hikes per year than priced in the forwards to stabilize the economy at full employment. This is roughly consistent with our current funds rate call that we will see an average of 3-4 hikes per year through the end of 2019, compared with market pricing of just over 1 hike."

Of course, if Goldman is wrong and the Fed has no intention of sending risk assets into a tailspin with a monetary policy "shock", then there is no saying just how much further the combined effort of China's gargantuan, if cooling, credit expansion, coupled with the "dovishly" hiking Fed can take stocks. However, by now it is becoming clear to even the most resentful permabulls - and even Goldman  - that the longer the Fed delays the day of reckoning out of pure fear of the unknown, the greater the chaos and loss in asset values when the Fed no longer has the luxury of picking when to pull the switch.

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This is it's picture

Shock them to hell!! 

Boris Alatovkrap's picture

"Control of market"?! What hell kind of arrogant asshole is presume to have control over market? This type of sociopath should be set on pike!

(Sorry, Boris is make it angry when hear such pretensious idea.)

remain calm's picture

You are God Damn right she has lost control because she has no fucking idea what she is doing nor anyone else at the Fed past or present. It would be no different then her trying to remove a brain tumor.

t0mmyBerg's picture

The Fed Funds market is dead, a non-entity essentially.  Technically, when they "hike" rates all they are doing is PAYING more in IOER to the giant primary dealers, most of whom are foreign banks.  So "hiking", while it might affect things on main street because the prime rate iincreases, is in a sense easing because the big banks have even more money to plunk down for the Fab Five.  So have they lost control?  Kinda.


The interesting thing to me is what will be the amount paid to the primary dealers that finally catches the attention of the press.  When someone notices and says, wait what?  The Fed is printiong up $x Billion and just giving it to the fucking biggest banks?  Right now that is at an annual rate of something like $24 Billion (1% of something like $2.4 Trillion of excess reserves).  Apparently that annual rate of charitable donation to those fuckers isnt enough to get anyones attention.  Maybe $50 Billion?  $100 Billion?  (that would require 4% on the current amount of excess reserves)

philipat's picture

I stopped reading at "Due to a sharp pickup in Global growth".

Creative_Destruct's picture

The fucking Fed should NEVER have been even THOUGHT to have control of the market to begin with...

The fucking Fed should NEVER have existed to begin with.  

Jeeez... EVERYTHING is so OBVIOUSLY wrong with this picture. The goddamn CBs are now so obviously the SHILL of the financial world slime that they now don't even hide their expectation that their CB hencemen should do anything other than "control the markets."


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DavidC's picture

Member for
5 weeks 2 days

Creative_Destruct's picture

CD is very much  "make it angry" too Boris.


GUS100CORRINA's picture

Goldman Asks If Yellen Has Lost Control Of The Market, Warns Of Fed "Policy Shock"

My response: ABSOLUTELY!!!! We are headed into uncharted, shark infested QE waters.


No. 885: Numbers Games that Statistical Bureaus, Central Banks and Politicians Play

May 8th, 2017

Topics: April 2017 Employment and Unemployment, Money Supply M3

• Headline Employment/Unemployment Numbers Were Too Good

• Jobs Gain Boosted by Heavily-Distorted Seasonals and Unusually-Large Upside Biases

• Unadjusted Year-to-Year Payroll Growth Dropped to a 68-Month Low

• Last Time Annual Payroll Growth Declined to that Level, the Economy Had Started Its Collapse into the 2007 Recession

• Household Survey Showed Shift from Part-Time to Full-Time Employment

• April Unemployment of 4.40% Was a 1-in-1,000 Shot; Could It Have Been Targeted?

• That Said, April Unemployment: U.3 Declined to 4.4% from 4.5%, U.6 Fell to 8.6% from 8.9% and the ShadowStats-Alternate Fell to 22.1% from 22.5%

• Those Were the Lowest, Headline Unemployment Rates for U.3 since May 2007, for U.6 since November 2007 and for ShadowStats since October 2010

• Nominal Money Supply M3 Annual Growth Rebounded to 3.3% in April, Versus 3.1% February and March, Otherwise at a 39-Month Low

Houses Depreciate's picture

The fed never had control. They just impose damage by collapsing demand via inflating prices.

Triple A's picture

moar!! before the wheels come off.

NihilistZerO___'s picture

Why in the fucking fuck should the Fed have "control" of the markets at all! Language is so important and the concept that our "markets" should be "controlled" by an unelected, unaccountable group of legitimized counterfeiters is anathema to a free economy.

There is no political solution to any of our problems while they are allowed to exist. Restore the Republic by any means necessary. Deport all dual citizenship traitors. After that let's destroy the Oligarchial Narco Failed State formerly known as Mexico and offer its land and resources to all those of Latin American decent in the USA who will voluntarily renounce their US citizenship. This new free Mexico would make a great neighbor.

wisehiney's picture

How's biz?

You mean how's .gov?

Right on NZ.

It sux.

And badly.


NDXTrader's picture

Sigh. Raising to 1% makes no difference at all when you can borrow pieces of paper the world around for 0% or less and buy valuable things with them. This thing doesn't break until there is an interest rate shock due to a lack of confidence. We are a long way from that (whether we should be or not). I've been saying the same thing since 2009 - everything goes up in dollar terms as long as people still have faith that those green pieces of paper are worth something, and then WAY up once they don't, before the collapse

The Joker's picture

It's not about money.  It's about sending a message....Everything burns!

NihilistZerO___'s picture

These so called "civilized" people. When the chips are down, they'll eat each other.

The Joker's picture

Their morals, their code, it's a bad joke.  Dropped at the first sign of trouble.

buzzsaw99's picture

okay, let me see if i have this straight.

goldman expects me to believe that they believe that yellen believes that the "market" believes that she is a dove when actually she is a hawk, which everyone knows she isn't?

logicalman's picture

Rates a 10 on my WTFometer!


wisehiney's picture

Brown U.


P.S. They are all skanks there, aren't they?

Yen Cross's picture

  My nifty widget  says this.


    Fed Rate Monitor Tool
Meeting Time: Jun 14, 2017 02:00PM ET
Future Price: 98.985
0.75 - 1.00

1.00 - 1.25

holdbuysell's picture

This entire article is a Red Herring. The markets don't need a central bank to dictate the price of money.

The entire argument needs to be reframed to 'why are private central banks controlling the price of money instead of the market in the first place.'

But, then, that would be a heretical in the religion of private central bank control of said money.

medium giraffe's picture

Exactly, why should an interest rate need to be artificially adjusted at all?  This isn't reality, just the latest 'normal'.

NDXTrader's picture

Outside of WWIII (or maybe not), why would stocks ever go down when you can borrow all of the money you want at an interest less than the Dow's dividend yield? It's free money. Better yet, borrow in Japan, get paid to borrow the money, buy the dividends and repay your loan in a depreciated currency. We will need to be at 4% at least (or headed there shortly) to stop stocks from going up

silverer's picture

Goldman asked that? Wow. Now we really are getting some transparency here!

coast1's picture

So, maybe a bit off topic but thought you might find it interesting...A friend of mine, 59 years old, was oon food stamps...single, kids grown...He was getting $190 a month on his EBT...They just lowered it to $145 a month...And maybe most of you heard, that food stamps/EBT have been cut off for those who are single men,  25-49....just thought I would share, seems they are really pulling back on entitlements.. WOnder where else they are doing this that I dont know about?

Grandad Grumps's picture

Goldman is in charge of Yellen, so WTF are they whining about?

khakuda's picture

The feds balance sheet is as big as ever. Europe Japan and Switzerland are printing like crazy. Even though the Federal Reserve has raised rates 75 basis points, inflation has moved up well more than that over the past few years which means real rates are more negative than ever. Real rates are all that matter.

The Federal reserve is so far behind it's not funny. At the same time, it means Asset prices have no business at these levels either.

small axe's picture

The only question that should concern Goldman is where the top execs want to spend their prison terms and whether or not they would prefer cells adjacent to Ms Yellen's iron cage.

Professorlocknload's picture

"Goldman askes if they selected the wrong cheer leader." All fixed.

GestaltNine's picture

Yellen is going to fix everything I expect the next rate hike will be 3.5% and Americans will start saving their money again and businesses will reinvest in themselves 

Seasmoke's picture

Mr. Yellen should be the next apprentice fired.

P Rankmug's picture

It's Fed Kabuki theater.  The Fed has to prove it can manipulate rates upward so it can lower them in the next crisis.  How does a rate hike tighten if the Fed's balance sheet remains the same?  It has been at $4.4 trillion since Oct 2014.  Why is this a surprise to Goldman?

Squids_In's picture

The Fed did not tighten monetary policy. It merely increased in the rate paid on excess deposits. That increased the subsidy to the banking system. That's $2.5 billion * 0.0025 = $6.25 billion in extra annual bank profits created out of thin air by the Fed. Nice. Assuming those profits are retained, they flow direct to tier one capital. With a 10:1 gearring that equates to $60 billion of extra lending (credit creation) from the banking system. So the Fed did indeed ease monetary conditions with a rate increase.


Bill of Rights's picture

Fire her Trump ... let's get this shit show in overdrive

Lost in translation's picture

Yellen has lost control of her colon. That foul stench wafting out of FOMC meetings is her adult diaper, reaching capacity...

Cordeezy's picture

This came from Goldman? The fed always has as much control as it needs until of course the economy crashes in which case they couldn't control that

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Vlad the Inhaler's picture

Pls provide name of company so we can buy puts.

Uranium Mountain's picture

Wouldn't 50-75 bps flatten the yield curve and pop the bond bubble?

Vlad the Inhaler's picture

The end of this stupid game will not come from Janet or the market or China but from consumer credit hitting the breaking point.  Soon.  Then more rate cuts and lost decades like Japan.

JBPeebles's picture

OK, so if the rates go up, economic activity slows. The hikes will affect both real growth--Main Street--and the financial economy, whatever the narrative.

The narrative is that we're in recovery. This allows the Fed to talk up raising rates while trying to keep them as low as possible.

Rather than be about the real economy, the Fed serves the banks and financial sector. It's stated mission is to preserve price stability and encourage full employment.

The constant improvement in official numbers hides the true scope of unemployment for a reason. If the stagnancy of the Real Economy is revealed, then rates will have to stay low and  the gravy train of low interest loans--$15 trillion and counting-- will just keep flowing.

Obviously the recipients of Fed help have used the low rates to leverage speculative bets in the marketplace. This has worked so far because new money keeps pouring in.

Once the Fed tries to sell its balance sheet, it'll precipitate a devaluation in the bond markets overall, with too many bonds for too few buyers. This selloff will have a major negative impact on overall markets. What's worse, the added stress of higher rates will further hurt Main Street and accelerate the retail armageddon, which in turn destroys commercial real estate. If it's like Japan ('93-) then the slowdown in consumer growth will devaste bank balance sheets, who will then need more capital. (This is why the Fed has been pushing for higher reserves.)

Without a buyer of last resort, asset prices will correct to a level closer to the true price point--which is lower, much lower. Many leveraged players will be washed out. So the Fed must come in and buy the defaulting loans--a scenario that rapidly rising rates will precipitate.

The lower oil price will push much of the energy debt into default. Likewise, commercial debt will have to be propped up as like it was in Japan. This means ongoing Fed buying. They can't let the cost of borrowing go up or it will degrade the value of equity portfolios and force highly leveraged players to sell.

It's only by supplying these speculators with nearly free capital that the system can be sustained. Make it too costly to borrow, or do anything to deflate the market and the Fed's true constituency--not the American people but rather Wall Street--will be most displeased. Meanwhile of course the Fed lies about a recovery (using doctored stats) and pushes the myth that rates will come up. Whatever the rates, it's clear both the equity and debt markets are being backstopped by the Fed.

Batman11's picture

Sailing on a ship of fools with the technocrat elite.

How do money, debt and banks work anyway?

Let’s look at the US money supply leading up to 2008:

If Central Bankers aren’t looking at the money supply, who is?

Everything is reflected in the money supply.

The money supply is flat in the recession of the early 1990s.

Then it really starts to take off as the boom gets going which rapidly morphs into the US housing boom, courtesy of Alan Greenspan’s loose monetary policy.

When M3 gets closer to the vertical, the black swan is coming and you have an out of control credit bubble on your hands (money = debt).

Most Central Bankers don’t interpret the money supply this way as they use the “financial intermediation theory” where money just circulates within the economy and banks act as intermediaries lending out the savings of others.

The dickweeds Greenspan and Bernanke couldn't interpret the data in front of them, they didn't understand money. 

Batman11's picture

The neoliberal confidence trick, pulling money out of the future and spending it today.

How does money and bank credit really work?

“…banks make their profits by taking in deposits and lending the funds out at a higher rate of interest” Paul Krugman, 2015.


The best way to think of it as borrowing your own money from the future.

When you get a loan the bank creates the money now, for you to spend today, in the future you make the repayments to pay back the money. The bank is back to square one and has collected interest for the service of lending you your own money from the future.

In the money supply you get the instant hit as that money is created from the loan and that money is then removed as the repayments are made.

97% of money in the UK comes from bank credit and it is constantly being created and destroyed.

The BoE explanation:

The trick of the neoliberal era has been not to understand money and bank credit like Paul Krugman. Its success has really just been about bringing money from the future into today, today looks better but tomorrow is impoverished.

Margaret Thatcher was the first person to bring neoliberalism to the West and this is the debt fuelled ponzi scheme of the UK economy.

Today has been good because we have been borrowing from tomorrow.

Greece enjoyed today until tomorrow came.

The ubiquitous neoliberal real estate boom has been one of the primary mechanisms for bringing money from the future forward to today. Today is good, tomorrow is not.

Japan showed the world what happens after in 1989, everyone ignored it.

Minsky's work is based on Irving Fisher's work on debt deflation in the 1930s, but you can't understand debt deflation if you don't understand money.

Probably why Bernanke's  work on the Great Depression didn't pick up on the debt deflation that follows these bubbles, he didn't understand money.

This is the underlying nature of debt:

Jam today, penury tomorrow

This is the neoliberal confidence trick, pulling money out of the future and spending it today.

Monetary theory has been regressing for one hundred years:

“The movement from the accurate credit creation theory to the misleading, inconsistent and incorrect fractional reserve theory to today’s dominant, yet wholly implausible and blatantly wrong financial intermediation theory indicates that economists and finance researchers have not progressed, but instead regressed throughout the past century. That was already Schumpeter’s (1954) assessment, and things have since further moved away from the credit creation theory.” 

“A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner

Today, mainstream economists don’t understand money and private debt is missing from today’s neoclassical economics due to the fictitious “financial intermediation theory”.

The neoliberal confidence trick occurs and no one can see it.

Apart from a few like Steve Keen who 2008 coming in 2005, his latest book “Can we avoid another financial crisis?” is worth reading and goes into the neoliberal confidence trick in more detail.

Batman11's picture

It is interesting to note the failure of different eras due to setting one parameter that eventually causes its downfall.

In the Keynesian era the target was full employment.

This eventually gave too much strength to workers who became more and more militant in their demands.

All predicted way back in 1943 by Kelecki.

This era has targeted inflation and excess money was supposed to show up in the inflation figures but it didn’t.

I can only assume that most of it has gone into financial asset price inflation which is outside of the inflation figures. There must have been an under-reporting of real estate prices in the inflation figures as we had real estate booms combined with low inflation figures.

Macavity's picture

I are Batman11! Thanks dark knight.

Macavity's picture

Two questions, Batman..
1 if banks just create money out of thin air for loans and credit cards, then why do they still want our money (ie savings and monthly salaries)?
2 why do banks cancel out principal repayment of a loan? Why not just keep the "cash" and pay bank employees salaries? Any evidence of this occurring anywhere?

J J Pettigrew's picture

The fact that Goldman expects the Fed to "control" the markets tells it all.

For Goldman benefits when the Fed is the main input into trading decisions....

Ask Steve Friedman and the other embedded Goldman folks in the Fed...