"Like watching paint dry," is how The Fed describes the beginning of the end of its experiment with massively inflating its balance sheet to save the world. As former fund manager Richard Breslow notes, however, Yellen's decision today means the risk-suppression boot is on the other foot (or feet) of The SNB, The ECB, and The BoJ; as he writes, "have no fear, The SNB knows what it's doing."
As we reported previously, In the second quarter of the year, one in which unlike in Q1 fund flows showed a persistent and perplexing outflow from US stocks, a trading desk rumor emerged that even as institutional traders dumped stocks and retail investors piled into ETFs, a "mystery" central bank was quietly bidding up risk assets by aggressively buying stocks.
The answer was revealed this morning when the hedge fund known as the "Swiss National Bank" posted its latest 13-F holdings. What it showed is that, as rumored, the Swiss National Bank had gone on another aggressive buying spree in the second quarter, and following its record purchases in the first quarter, the central bank boosted its total equity holdings to an all time high $84.3 billion, up 5% or $4.1 billion from the $80.4 billion at the end of the first quarter.
So here we go with the latest installment of the Fed’s will they or won’t they show. It seems from reading all the insights that we’re meant to expect a dovishly spun hawkish move.
We get the balance sheet announcement, tempered by a Summary of Economic Projections that acknowledges what inflation hasn’t been up to. And maybe a small decrease in the slope of the dot plot curve showing the longer-term rate hike path. Presto chango, everyone is happy. Any frayed nerves out there will be soothed. The market is expected to take it well, the FOMC can tick off the box of another “normalization” milestone and we’ll see what happens between now and December.
Now that we know what they’re expected to do, here’s what they should do -- not let up one iota about that third 2017 rate hike and each one being promised for next year. The domestic economy can handle it and looking around at the rest of the world, so can they. Central bankers, the world over, are feeling chuffed and not hesitant to say so, even if they stick in the boilerplate about geopolitical risks. Tellingly, at the end not the beginning of their talks.
Just today, in a speech that could have been made by any number of policy-makers, the RBA’s Luci Ellis said that the global economy had “turned” and bankers run the risk of falling behind the curve. When was the last time that was emerging as the prevailing view? It’s really quite ironic, that it seems the most downbeat commentators are the ones describing the U.S. economy. Which is absurd. But everyone is entitled to their own macro view.
There’s another reason that the Fed should feel empowered to keep looking for opportunities to hike. It’s not data and event dependence, which always provides a credible out if needed. The balance sheet run-off is more limited than even they are willing to admit. Sure the amounts will be small and well telegraphed. But that’s just looking at the plain vanilla stuff that Congress explicitly authorized them to buy.
What has made QE the magic elixir extolled by its proponents has been the added oomph of the relentless purchases of U.S. equities by other, friendly central banks. We like to pretend that our version is pure and therefore easy to undo. Which is true, but only if you pretend it’s really all been just liquid fixed income. In truth, the economy will continue to be stoked by ongoing QE that we don’t even own up to and therefore the trade-off between balance sheet and official rates is less than currently imagined.
As Breslow concludes, rates can go up, down or nowhere. Balance sheet run-off can be done at most any speed. But as long as U.S. equities remain the AAPL of sovereign wealth funds’ eyes, the Fed has a lot more room to maneuver than we think and they should take advantage of that fact.
Simply put - for now - nothing else matters...