"You Should Take The Fed At Their Word"

Tyler Durden's picture

Authored by Wolf Richter via WolfStreet.com, 

Flip-flopping killed its credibility. That’s a problem for the markets.

“They’re getting more worried about the negative consequences of QE”: Fitch Chief Economist

The markets have been brushing off the Fed and have done the opposite of what the Fed has set out to accomplish. The Fed wants to tighten financial conditions. It’s worried about asset prices. It’s worried that these inflated assets which are used as collateral by the banks, pose a danger to financial stability. It has mentioned several inflated asset classes by name, including commercial real estate, which backs $4 trillion in loans heavily concentrated at regional banks.

And yet, markets have loosened financial conditions since the Fed started its tightening cycle in earnest last December.

Markets are hiding behind “low” inflation, when the Fed is focused on asset prices.

So longer-term yields have been falling even as short-term yields have moved up in line with the Fed’s target rate, and thus the yield curve has flattened. The dollar has been falling. Equities have been soaring to new highs. And companies, if they’re big enough, are able to get funding for the riskiest projects at stunningly low rates.

“I think there is maybe too much confidence that the Fed is not really going to do too much more on interest rates, that we’ll have one or two more rate hikes and that’s it,” Brian Coulton, chief economist for Fitch Ratings, told Reuters on Tuesday.

Market participants are expecting “just one or two interest rate increases a year” despite the Fed’s stated expectation of seeing long-run interest rates at around 3.0%.

“When the Fed says they’re going to engage in a gradual rate of interest rate increases, they mean three or four rate hikes every year and we think that’s what they’re going to do,” Coulton said.


“We think that you should take them at their word and it may even be a little faster than that.”

This disconnect between market expectations and the Fed’s stated intentions could create volatility in fixed-income markets when markets finally catch up, he said.

Volatility, when it’s used in this sense, always means downward volatility: a sudden downward adjustment in prices and spiking yields – a painful experience for the coddled bond market with big consequences for the stock market.

“We think they’re going to be … getting more worried about some of the negative consequences of QE, the fact that it encourages risk taking and may create some issues for the banks,” he said.

And he expects – this is “more of a personal view,” he said – that the Fed will continue with the rate hikes, or even accelerate them, even if consumer price inflation remains low.

Despite “low” consumer price inflation – which is in the eye of the beholder – the Fed has raised rates four times since December 2015, including three times over the past nine months. Before the rate hikes began, the Fed’s target range for the federal funds rate was 0% to 0.25%. Now it’s 1.0%-1.25%.

Federal funds futures are expecting just one more rate hike by August 2018. And as the Fed moves forward, it might trigger a sudden adjustment in yields as markets catch up with the Fed.

The Fed has caused this disconnect on its own. Starting in 2013, it has engaged in relentless mind-numbing flip-flopping, first on tapering of QE – the subsequent Taper Tantrum in the bond market caused furious flip-flopping – and then on raising its target for the fed funds rate. In an astounding cacophony, Fed heads have publicly disagreed with each other and their own prior statements. At every squiggle of the markets, perhaps worried about their own portfolios, they flip-flopped from prior communications of their intentions.

During this period, they took their credibility out the back and shot it. And when that credibility seemed to still have any life left in it, they shot it again. And even after everyone saw that it obviously had no more life left in it, they shot it again, just to make sure.

Now no one believes them anymore. It’s hard to revive a credibility with so many holes in it. But that’s what the Fed is trying to do. And since December, it has been sticking to its story with a focus on asset prices, the chase for yield, the banks, and financial stability – essentially brushing off a bout of “low” consumer price inflation.

Next up is the well-telegraphed announcement at the September 19-20 meeting to unwind QE. The amounts and the mechanics have already been announced. Now it’s just a matter of announcing a start date. If they stick to it, it’s one more move – a huge move – in their efforts to revive their credibility.

But reviving credibility, after it has been so thoroughly shot so many times, will take years. No one will easily forget the endless flip-flopping between 2013 and mid-2016 that made laughingstock out of these people. Now markets keep expecting the Fed to flip-flop all over again. But since the fall of 2016, it hasn’t. And markets are not prepared for a non-flip-flop Fed.

Retail investors are now just as optimistic about stocks as they were in January 2000 just weeks before the dot.com crash began. Read… Finally the Contrarian Warning from Small Investors

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buzzsaw99's picture

The fed lies as if it were a body function.  they issue six contradictions per day sometimes.

1 Alabama's picture

The Fed, always wrong, butt never in doubt!

jcaz's picture

Check is in the mail,  I get checked at the clinic twice a month, I won't cum in your mouth,  you're the only girl I've been with since my divorce, 16 is legal age in most states.....

Golden Breakout's picture

You cannot trust ashkenazi pharasaic converts.

absente reo's picture

Monetisation would be if they had no intention of reversing the QE.

Considering they're about to announce next week that they will start the process of not reinvesting the proceeds of maturing bonds, that seems to not be the case.

oddjob's picture

Its not a big secret that she uses Depends.

dilligaff's picture

What's an 80 year old womans panties smell like?



oddjob's picture

I hear they burn her chair after each meeting.

Golden Breakout's picture

I believe you meant 80 year old man.

yogibear's picture

Yeah, sure. Printing, more debt/QE is all they how to do. 

Since nearly every asset has been bubblized there will be no more free markets and price discovery.

Their taking down  the national debt sign in NYC, talking about getting rid of any debt ceiling. Seems like their final party before the music stops and the Oh Sh#) moment.

DinduNuffin's picture

print the money and buy all the things!

Termin8or's picture

Depends on the meaning of "Depends"

buzzsaw99's picture

as usual fitch is clueless

taketheredpill's picture


The Yield Curve used to lead the Economy, back before Monetary Policy was rendered impotent by Debt.  Now the Economy is leading the Yield Curve. Lower.


aloha_snakbar's picture


"You Should Take The Fed At Their Word"

No, what we should do is pull the Feds entire intestinal track out of their left nostril, one inch at a time...

Ron_Mexico's picture

pull it out their @**hole an inch at a time with pliers, like they do down in Mexico. Makes for a long weekend.

Pollygotacracker's picture

Flay (skin) them alive. That's what the ancient Assyrians did to the Hebrews. Very nasty.

ET's picture

What was that saying again?

Don't fight the Fed.

They are in control and you are not.


Even the President of the United States is subservient to the bankers' interests.

Kurpak's picture

Don't fight the fed... I always hated that saying. Why wouldn't you fight your mortal enemy? A banker must have made that up. Fight them tooth and nail!

Rebelrebel7's picture

The Federal Reserve and their member banks are economic hitmen out to destroy the US economy and millions of families in a Fedgeneered economic apocalypse. Don't hold an account with one of these diabolically evil Federal Reserve member banks! They receive 6% interest on your deposits from the government, financed by you, the tax payer and you get almost nothing! They have cash at hand and are determined to anhialate assets so that they can buy them at bargain basement levels, and then create another bubble and resell them to consumers at peak levels. That is their modus operandi, and they should take me at my word, that I will spend my last dying breath exposing them for the psychopathic  fraudsters that they are! 

IT WOULD BE IN THE NATIONAL INTEREST if they would fuck off! 

If we continue down the yellow brick road of the Federal Reserve Act of 1913 and privately owned international central banking cartel:


1.)We will destroy the economy  when we  reduce the national debt,  because the money supply is based on debt.


2.) There will  be an endless boom bust cycle because when the banks issue loans, they create money in the equivalent of the principal of the loan, but do not create the money required to pay the interest on the loan, leaving a shortfall in the money supply of the interest payments required.


3.) We will go deeper into debt or destroy the economy because the only central bank solutions are  to issue more debt or destroy the economy.


We should not revert back to the gold standard.  It has always ended in failure. The majority of the wealth has ended in the hands of a select few every single time that it has ever been implemented.


The rise of cryptocurrencies has proven how simple it would be to eliminate the central banks. All accounting of a Congress issued currency  must be open to the public at all times. 


If Congress were to resume its responsibility as stipulated in Article 1 Section 8 Clause 5 of the constitution and coin money and regulate its value debt free, and if other nations would do the same:


1,) The budget would automatically balance 


2.) There would be no need for income taxes, estate taxes, capital gains taxes, and corporate taxes


3.) There would be no need to reduce spending

For more on this please read The Web of Debt and the Shocking Truth About Our Money System And How We Can Break Free by Ellen Hodgson Brown J.D. 

Golden Breakout's picture

It's all jawboning. The fed is trapped. They CANNOT raise rates, and they CANNOT shrink their balance sheet, WITHOUT tanking the system.

Blankfuck's picture

Fed Reserve fuckers will be parting like its 1999 with their banker fucker friends! Great job with the con job fellers!

Pop3y3too's picture

the fact that it encourages risk taking and may create some issues for the banks,” he said.


Sure, issues that can easily be remedied with sheeple tax money.  In other words, "Not an issue."



moneybots's picture
"You Should Take The Fed At Their Word"


In a word, no.

quesnay's picture

The Fed has never kept their word so far. Not sure why they would start now.

Batman11's picture

The FED are a laughing stock at the BIS.


Learn more in 15 mins about financial stability than any Central Banker. 


Central bankers just make it look hard.


Send the FED the link and put them out of their misery, it's not hard.


This graph highlights unproductive lending in the US economy, 1929 and 2008 stick out like sore thumbs. 

The FED are making fools of themselves and they will be a laughing stock at the BIS.

The BIS use the credit-to-GDP ratio for a reason, look how easy it is.

khakuda's picture

Over the past nine years we have had a couple percent of inflation each and every year yet interest rates were 0 for 8 out of the last nine years and they are still far under the inflation rate and likely to remain below the inflation rate for at least another year. That is 10 fucking years of negative real interest rates so far that the economy has had to endure. Even if inflation were around 2% a year we have had 18% inflation over that time with barely 1% return to cash funds and savings accounts. If you wanted to convince people to buy stocks and create a bubble in the stock market this was sure the way to do it.

The stock market bubble of the late 1990s in the real estate bubble of the mid to thousands both ended incredibly badly. The solution was to create the mother of all bubbles, because they must have thought that the last two worked out so well. Genius.

fulliautomatix's picture

Probably the fastest way for them to regain credibility is to do nothing, and keep on doing it.