Ben Bernanke told those that could afford to hear that rates would not "normalize" in his lifetime and just last week we noted the market's shifting attitude towards what a post-rate-hike 'rate normalization cycle' might look like [8]. As longer-term bond yields tumble, the Fed's Bill Dudley just confirmed the lower post-rate-hike "terminal rate" meme:
- DUDLEY: LONG-TERM RATES LIKELY TO BE LOWER THAN HISTORIC NORM
- DUDLEY SAYS EQUILIBRIUM REAL RATE MAY BE LOWER THAN NORMAL
In other words, if and when the Fed starts raising rates, the highest rate to which it will raise rates in the next cycle is now expected to be notably below previous historical 'norms'. And stocks didn't like it and long-term bond yields tumbled...
[9]
Of course, the slowing down of the economy, snow or no snow, is precisely the reason why bonds are bid. We explained as much recently [10]:
"When the Fed begins lifting rates is almost not an issue any more,” Stan Jonas, former managing partner of Axiom Management Partners in New York, "The real question is how fast does the Fed increase rates and where do they stop. The market now sees diminished macroeconomic expectations and expects the Fed to ending the upcoming tightening cycle at around 3 percent."
[11]
In other words, the bond market believes in the Japanization of America and another lost decade as the new normal low/no growth world slugs along with no escape velocity dreams anytime soon.
Or even more clearly - it's about more than this cycle... the Fed's taper will run its course, the Fed will tighten rates and the economy will slump rapidly meaning the Fed will ease once again (and by then QE will have lost all credibility as anything but an asset inflation machine and along with it - the Fed's credibility)... the tumble in forward rates indicates the markets growing belief that the future growthiness looks very different from the dream priced into stocks...
Or, in other words, the Taper will lead to the Untaper, as we predicted exactly one year ago, leading to QE number... we don't even know the nuimber any more - 5, 6, 7? Rinse. Repeat.
Perhaps Plosser had it right:
- *PLOSSER SAYS PEOPLE EXPECTING `TOO MUCH FROM MONETARY POLICY'