For the latest confirmation of just how trapped in a corner of its own making the Fed now finds itself, look, or rather read no further than the presentation given moments ago by St. Louis Fed president James Bullard before the CFA Society in St. Louis which was circular, confusing, illogical, and thus a splendid summary of the Fed's "thinking" from beginning to end.
In it Bullard, who one month ago said he favors 4 rate hikes in 2016, said that it would now be "unwise" for the Fed to continue hiking interest rates given declining inflation expectations and recent equity market volatility, in comments that mark a stark change of direction for one of the Fed's more hawkish inflation foes.
What he really meant is that having digested the Fed's policy error which was the decision to hike rates in December in the middle of a global recession (as warned here quite explicitly) not only did global markets tank, but so did inflation expectations (the 5Y5y inflation outlook for the US was lower than that for Europe as recently as one week ago) with the market now pricing in not only a halt to rate hikes, but a return to ZIRP if not Negative rates in the U.S.
And here comes the first confirmation of just how confused the Fed is:
- BULLARD SAYS FED HAD GOOD REASONS TO HIKE IN DECEMBER AND DOES NOT CONSIDER THE MOVE A MISTAKE
Yes, the Fed it hiked: and the hike itself led to the collapse in not only inflation expectations but markets, and the latest devaluation of the Yuan. But one clearly can not be a Fed economist to realize all these very simple things.
The ironies continues: Bullard, who for much of last year argued for an earlier rate hike, said he now feels key assumptions supporting higher rates have been undermined.
Inflation expectations have fallen "too far for comfort," making it more probable inflation itself will fall and continue to miss the Fed's 2 percent target, Bullard said in remarks prepared for delivery to a gathering of financial analysts.
"I regard it as unwise to continue a normalization strategy in an environment of declining market-based inflation expectations," Bullard said. In addition, declining equity prices and other tightened financial conditions have made dangerous asset bubbles "less of a concern over the medium term."
As a result, it would be "unwise" for the Fed to continue hiking interest rates given declining inflation expectations and recent equity market volatility.
And just like that, Bullard admits that just like all throughout the 2009-2015 period, the Fed remains hostage to the market's every whim.
Then there was the topic of bubbles, which was mentioned on at least 8 separate occasions in his presentation. His point here was simple: at 2100, the S&P is too high and so the Fed was justified to hike; at 1900 the S&P is too low and the bubbles have popped. It appears that for the Fed, the Fed balance sheet implied fair value of 2,000 for the S&P is the perfect sweet spot of "fair value".
This lunacy is best summarized by the following tweet:
Bullard says one reason for hiking was to prevent bubbles. Then after they hike and stocks fall he says they should pause hiking. Circular?— GreekFire23 (@GreekFire23) February 18, 2016
Here is one of the Fed's biggest fake hawks justifying the need for a full Fed relent, and halting the rate hike cycle until risk asset prices increase:
- BULLARD:TIPS SPREADS DOWN 100 BP; WANT TO SEE COME BACK UP
But what about the Fed's own inflation survey which suggest far higher inflation expectation?
- BULLARD:DON'T TRUST SURVEY MEASURES OF INFL EXPCNS; TOO STATIC
Translation: these aren't influenced by the S&P500 so ignore them.
Another question: what if the market is simply reflecting the slide of the world into another recession?
- BULLARD: DON'T THINK GLOBAL MKT SELL-OFF PREDICTING RECESSION
Oh ok. But what if it is?
- BULLARD: PLENTY OF CAPACITY TO EASE IF NEED TO
Yeah, 25 basis points.
But the punchline, and why tonight's speech was a rerun of the first Bullard moment from October 15, 2014 when the market soared after Bullard hinted at QE4 was the following:
- BULLARD: MOST NATURAL OPTION IF NEED WOULD BE FURTHER Q.E.
And there it is: the first admission that the Fed is not only contemplating NIRP - in the middle of a rate-hike cycle no less - but also QE.
What should be most troubling for the Fed is that while any other time a Fed hint of more QE would have sent futures soaring, that this time nothing is happening as a result of the "second Bullard moment" is the most disturbing sign that not only can the Fed can no longer jawbone the market higher, even with the most nonsensical statements and hidden promises, but that the Fed is on the verge of losing control of the market.
For those who wish to waste 5 minutes of their life, his presentation is below (pdf)