Cudmore: Yellen Just Made A Big Mistake

One of the lingering questions to emerge from yesterday's FOMC meeting, after Yellen's "first dovish, then hawkish" statement rocked the dollar and markets, is whether the Fed chair has some more accurate way of forecasting inflation than the rest of market to justify her optimistic outlook, and to explain why the divergence between the Fed's dot plot and the market's own FF forecasts is nearly 100%. And, if not, is the Fed about to make another major policy mistake by forecasting a far stronger economy than is possible, culminating with a recession.

According to Bloomberg's Mark Cudmore, the answer is that while Yellen is desperate to infuse confidence in the market, the Fed, which "hasn’t been correct for seven years", remains as clueless as ever, which is why the Fed's hawkishness is actually a signal to buy long-end bonds, which will add to further curve tightening and ultimately precipitate the next recession. 

Put otherwise, "if Yellen had acknowledged that the policy frameworks she and her colleagues have been using since the crisis have all been incorrect, then we might believe she has a chance of now applying a more appropriate framework and has a credible plan to sustainably hit the inflation target. Instead, traders can’t help but feel that no lessons are being learned and will have to raise the probability of a major policy mistake in market pricing. This means that the yield curve will need to flatten further through long-end yields dropping."

In simple words: the Fed has just brought the next recession that much closer, which shouldn't come as a surprise.  As we showed before, every Fed tightening akways ends with a recession. The only question is when.

From Marc Cudmore's latest Macro View.

Fed’s Hawkishness Is Negative for Long-End Yields


It may seem counter-intuitive but the Fed’s optimistic perspective on the U.S. economy makes it more likely that 10-year Treasury yields have more downside.  The problem for Janet Yellen is that the data is there for us all to see: What few inflation pressures did exist are now receding rapidly. By failing to comprehensively address the fact that the committee’s projections are constantly over-optimistic, they further undermine their own credibility.


The Fed hasn’t been correct for seven years. The evidence would suggest their models are broken. Yellen still cites the Phillips curve even though some of her own committee have questioned its validity and it has shown no sign of working as anticipated in recent years.


Temporary factors are cited as the reason for low inflation - for example a decline in mobile phone bills - without acknowledging that the technological innovation frequently behind such factors isn’t a temporary phenomenon.


Technology is also helping drive down external inflationary pressures coming through from commodity prices. And the committee’s models don’t seem to adequately account for demographic disinflationary impulses either.


If Yellen had acknowledged that the policy frameworks she and her colleagues have been using since the crisis have all been incorrect, then we might believe she has a chance of now applying a more appropriate framework and has a credible plan to sustainably hit the inflation target.


Instead, traders can’t help but feel that no lessons are being learned and will have to raise the probability of a major policy mistake in market pricing. This means that the yield curve will need to flatten further through long-end yields dropping.


cherry picker Thu, 06/15/2017 - 06:11 Permalink

The only ones that ever seem to make money in every recession I lived through are banks and oil companies.  Interest rate are always cited to lower inflation, but they always cause inflation.But then, the country is run by lunatics, so this is to be expected.

Sudden Debt Thu, 06/15/2017 - 06:14 Permalink

Just talked to a ceo of one of the largest insurance of germany, their revenue is droppibg like a rock for 6 months now. I'll short them after te summer.Also talked to one of the largest steel structure builders in europe, most of their revenue now commes from maintenance.You now hear it everywhere that there's a slowdown after the peak.Question is: is it just a summer slowdown or something bigger... 

HockeyFool Yen Cross Thu, 06/15/2017 - 08:25 Permalink

WTF?"OLE Yellar, hates Trumph.  Those three words naiiled it."1)OLE2)Yellar3)hates4)Trumph.That's 4 words where I come from. Translations:OLE - Ol' (Mexicans yell Ole at bullfights or some shit)Yellar - Yeller (redneck for yellow)Trumph - Trump (close, if you had said Triumph it might have worked)Naiiled - Nailed (I thought this might be some muzzies first name)  

In reply to by Yen Cross

fattail buzzsaw99 Thu, 06/15/2017 - 07:34 Permalink

You don't expand your balance sheet to 5 times its original size and keep short term rates at 0 for 7 years because you have a choice or are aiming for some objective inflation target.  They did it to so the bank's could recapitalize themselves after their collateral took a 40% haircut and to keep it fom going to 80%.  Now they have a bubble that everyone talks about but won't sell because they know the fed is bluffing.  Or... maybe netflix is woth 150 times its earnings?  Amazon worth 184 times their earnings?  

In reply to by buzzsaw99

TheSilentMajority Thu, 06/15/2017 - 06:19 Permalink

With real CPI hovering between 7%-12% annualized for the last 20+ years, it may be time for some very aggresive 50bps or 75bps hikes the next few Fed meetings.

Stagflation has been upon us for many years already.

Ricki13th Thu, 06/15/2017 - 06:46 Permalink

This hawkish talk is a huge setup for failure. The tribe will not raise rates again this cycle because we will be in a recession by this fall. Economy is rotting and all the fed is doing is accelerating the demise and saying everything is awesome.

buzzsaw99 Thu, 06/15/2017 - 06:19 Permalink

the fed is tentative, laughable, and pitiful.  their "policy mistakes" are nothing but half baked mamby pamby milquetoast drivel.  this is what keeps cudmore awake at night?

scoutshonor buzzsaw99 Thu, 06/15/2017 - 07:19 Permalink

The jury may still be out in regard to the magnitude of the fed's policy errors.  When they begin to unwind the balance sheet anything could happen.  This grand experiment has never been done before--there are no data about how this works in reverse.I don't know what will happen--neither does anyone at the fed.  One possible outcome could be that Yellen and company will go down in history as truely gifted policy error savants.

In reply to by buzzsaw99

CoCosAB Thu, 06/15/2017 - 06:22 Permalink

"Yellen Just Made A Big Mistake"She's just following ORDERS! The OWNERS of the monetary system have set a date (04-12-2017) for the beginning of the NEXT BIG PARTY! So it's absolutly necessary that the I.R. go up - not to much... just enough - so that the conditions are created for the next huge transfer of wealth. Don't WORRY HERD OF SLAVESup, up"WORK, CONSUME, COMPLY"

buzzsaw99 Thu, 06/15/2017 - 06:35 Permalink

the fed's mistake was ever being born. they meddle, backstop, bail out, then crash, then bail out, then crash, then meddle, then tinker, then call it a market. give it a rest cudmore-bitchez. methinks cudmore bitchez would like a nice suckle off yellen's enormous hairy nipples. lulz

GodHelpAmerica Thu, 06/15/2017 - 06:36 Permalink

Curve will invert from 3 mo to 2 yr range long before the 10yr throws up the flag. Could happen in weeks...That said, I don't disagree with the author that the entire curve will flatten between now and the fall, barring an enormous and unforeseen pick up in REAL growth.

Surprise, surprise...yellen won't get to her balance sheet unwind...not that any of us believed she would anyway.

0hedgehog Gold Banit Thu, 06/15/2017 - 09:37 Permalink

Spiking it down is the easiest thing for the cabal to do now since there is next to no volume and there are hundreds of contract ounces for every actual ounce of metal. For silver, it's over 500 to 1 last time I saw the figure. Bitcoin is where they want us.....not in metals, and they are suceeding in a big way. At least that is true in the U.S. where the indoctrination agaist metals has been relentless for years now. I see it as a gift. They are allowing those of us who "follow the money" to get onboard if we are smart enough while they know most of us are not.

In reply to by Gold Banit

lester1 Thu, 06/15/2017 - 06:47 Permalink

None of this matters as long as the Federal Reserve remains unaudited and are covertly buying stocks and paper gold contracts.We could be in an official recession, yet the market will stay propped up due to unaudited electronic money buying stocks. Stop by 33 Liberty Street in New York City and thank the Federal Reserve's PPT for keeping your portfolio artificially propped up!

Let it Go Thu, 06/15/2017 - 07:05 Permalink

Almost a decade ago Ben Bernanke as Fed Chairman, started us down the path of quantitative easing and artificially low-interest rates. A great deal was made of his having studied the great depression era and claims he knew how to avoid a great deal of financial pain.Today we find we are still trapped in the box Ben Bernanke built with no way out, compounding our problems is the fact we never received the promised economic growth promised to flow from his financial remedy. The article below explores this situation.

Batman11 Batman11 Thu, 06/15/2017 - 07:13 Permalink

The BoJ blew a bubble and burst it just to provide a crisis for the neo-liberal conversion (1989).Richard Werner has followed Japan from success to economic basket case, loaded up with government debt in “Princes of the Yen”. also covers the transition of the other very successful Asian economies to the less successful neo-liberal model, via The Asian Crisis 1997.  

In reply to by Batman11

lucyvp Thu, 06/15/2017 - 07:48 Permalink

Inflation target should be renamed theft target.  /sarc-on   otherwise, great piece /sarc-offof course anything rising in price is conviently left out or obfuscated away from the cpi.I make nearly the same salary I did in the dot-com days.  Had prices not gone up I would be retiring now.Now I see 15 more years of work ahead of me if I live that long.

0hedgehog Thu, 06/15/2017 - 08:44 Permalink

"the Fed, which "hasn’t been correct for seven years", remains as clueless as ever" They know exactly what they are doing! Make no mistake, there is a underlying plan at work here. It is only the public who is clueless to that plan.

Lost in translation Thu, 06/15/2017 - 08:53 Permalink

Question: if you had an annuity reaching end of term 1 Dec 17, would you pay the penalty and cash out now?

Or wait and ride things out?

That's my last of anything in the market [sic], an annuity with NYL. If this thing holds together 7 more months I can cash out at no penalty, and divide distribution over Q4 2017 and Q1 2018. Less of a tax hit.

But with things spinning out of control, will I even have unfettered access to my dough?

I'm conflicted about what to do...

LotUnsold Lost in translation Thu, 06/15/2017 - 10:32 Permalink

That really is a tough one.  This lie can run and run for as long as they want it to.  I have been thinking that it should have imploded at around the time of the dotcom bubble or at least in 2001.  I suppose the answer is how much else you have got and can you afford to lose this.  Personally I would ideally not have any money in banks as I expect that to be stolen.  Part of it is what Trump intends to do and if he really is trying to wrest back control or if he's just playing out his part.  Another thing to remember is that, usually, the stock market crash goes pretty unnoticed in the wider economy for at least six months.  Personally I would never own an annuity because they are a racket, and pension funds just eat your money.  But if this were a pension fund i would sell out now and take the hit because that is more than made up for by the toppiness of the markets.  You'll also (I assume) get a higher return when interest rates rise.  Personally I would head for safety but that could just be the fear porn getting to me and i have been wrong for 15 years.

In reply to by Lost in translation