Fed Chair Powell's Admission: "The Fed Has A Short Volatility Position"

For years, market watchers and Fed skeptics had warned that the record low volatility "blanket" that has fallen like a pall over the comatose market was the result of Fed actions, both direct or indirect. And while they mostly spoke metaphorically (although back in 2012 we observed a distinct shift in the VIX futs  when the current head of the Fed's trading desk, Simon Potter, replaced Brian Sack), we now have explicit confirmation that the Fed's "short vol" position appears to be rather literal.

This is what the next Fed Chair, Jerome Powell - who is scheduled to replace Janet Yellen next month - said during the October 23-24, 2012 FOMC meeting - just one month after the Fed announced QE3, as today's just released 2012 FOMC transcripts revealed:

I have concerns about more purchases. As others have pointed out, the dealer community is now assuming close to a $4 trillion balance sheet and purchases through the first quarter of 2014. I admit that is a much stronger reaction than I anticipated, and I am uncomfortable with it for a couple of reasons.

First, the question, why stop at $4 trillion? The market in most cases will cheer us for doing more. It will never be enough for the market. Our models will always tell us that we are helping the economy, and I will probably always feel that those benefits are overestimated. And we will be able to tell ourselves that market function is not impaired and that inflation expectations are under control. What is to stop us, other than much faster economic growth, which it is probably not in our power to produce?

And then the punchline:

[W]hen it is time for us to sell, or even to stop buying, the response could be quite strong; there is every reason to expect a strong response. So there are a couple of ways to look at it. It is about $1.2 trillion in sales; you take 60 months, you get about $20 billion a month. That is a very doable thing, it sounds like, in a market where the norm by the middle of next year is $80 billion a month. Another way to look at it, though, is that it’s not so much the sale, the duration; it’s also unloading our short volatility position.

Ah yes, unloading the Fed's "short volatility position". Maybe someone can ask Powell at the next FOMC press conference just where that stands today, and whether he is still as skeptical the Fed will succeed in unwinding its balance sheet, as he was in October 2012:

My third concern—and others have touched on it as well—is the problems of exiting from a near $4 trillion balance sheet. We’ve got a set of principles from June 2011 and have done some work since then, but it just seems to me that we seem to be way too confident that exit can be managed smoothly. Markets can be much more dynamic than we appear to think.


When you turn and say to the market, “I’ve got $1.2 trillion of these things,” it’s not just $20 billion a month— it’s the sight of the whole thing coming. And I think there is a pretty good chance that you could have quite a dynamic response in the market.

Fed's VIX trading aside, here is perhaps the most fascinating part of Powell's speech, one which contains some truly unprecedented - for a future Fed chairman - admissions:

I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.


Source: Federal Reserve


IH8OBAMA Scuba Steve Fri, 01/05/2018 - 20:14 Permalink

When Powell talks about a position in volatility I think he is talking about the steady QE that resulted in a one directional market - not necessarily taking a short position in the VIX.

He does appear to be concerned that as the FED unwinds their balance sheet the (bond) market won't look at it as a monthly liquidation that can be absorbed easily but instead look at it as a single large block perpetual seller coming into the market thus depressing bond prices significantly right from the get-go.

It's just a round about way to say there are concerns about how the FED can unwind their balance sheet so that the markets don't over react.

In reply to by Scuba Steve

Pollygotacracker Entitled_TD Sat, 01/06/2018 - 07:24 Permalink

IH8OBAMA is only repeating what David Stockman has been saying. It will be a miracle if the Fed can 'unwind' and raise rates at the same time without tanking the 'market'. Good luck with that.

Update: The Fed ( according to the recent SOMA report ) reduced its balance sheet by .14% ($6 billion) so, at their current rate, it will take them 13 years to unwind. Unreal.

In reply to by Entitled_TD

Entitled_TD 3LockBox Fri, 01/05/2018 - 21:59 Permalink

If you weren't simultaneously jerking off and looking for every fucking opportunity to go:  "SEEEEEE. it's a conspiracy!" you might actually have a second to see that Ih8obama was just trying to explain to the dunderheads like you out there the actual economic meaning of the potential chairman's words.  But nooo, everything is a chance to come all over yourself, dreaming and creaming all at once over your infantile pseudo-ideology.


But if you aren't willing to actually understand anything, or question anything, you are quite useless to anybody!

In reply to by 3LockBox

3LockBox Entitled_TD Fri, 01/05/2018 - 23:15 Permalink

The Fed is jerking everyone of us off.

It is a waste of time to try to interpret what these lying scumbags think, say or mean.

BTW the Federal Reserve's whole existence is a conspiracy. You know it, I know it and 90% of the active people on these boards know it. I don't have to say "see" to anything.

In reply to by Entitled_TD

shuckster 3LockBox Sat, 01/06/2018 - 12:52 Permalink

Thank you. The Fed can short whatever it wants, buy whatever it wants. There's no way to stop it certainly. But what's important about this article is that the Fed is openly admitting it has once again, after the fact, changed it's mandate. At this point, I think the Fed should just go from metaphorically ass fucking traders with whom it has political disagreements, to actually sending dildo's to traders houses with explicit instructions to fuck themselves with said dildos. It doesn't matter what the Fed does, none of what it does is sacrosanct or pure or anything close to consentual with the general public. The Fed, as it is, like the IRS, is a political weapon used to smash political opponents. It's everyone's job to start steering themselves permanently away from the use of the dollar and into something that the Fed has no impact on. Obviously, I'd like to see Yellen hang, but I think that would make her a martyr. I'll just have to accept firing her and forcing her to live the rest of her life in obscurity, surrounded by her cats and hopefully eating their cat food too

In reply to by 3LockBox

mkkby IH8OBAMA Fri, 01/05/2018 - 21:31 Permalink

That's exactly how I read it.  Nice to see a few hedgers are still rational.

We have two types of readers here at the hedge.  Autistic computer nerds who take everything literally.  Conspiracy nuts who think joos are hiding behind every bush waiting to strike.

It will be interesting to see what happens with a fed chairman who understands trading.  They've already started unwinding the QE.  Things could get interesting in a hurry.


In reply to by IH8OBAMA

Clowns on Acid IH8OBAMA Sat, 01/06/2018 - 13:51 Permalink

IH8 - I also interpreted Powell's "volatility" remark as QE 1.2,3, providing a virtual, de facto short volatility position encouragement to the markets (Equity, bonds, etc)

However, it was a very interesting choice of words by Powell. Bernanke nor Yellen would have used that word "volatility". I think the better question for Powell is "Does the Fed have an equity or equity index position? Does the Fed "intervene" in the gold markets?

What is the remit of the Plunge Protection Team?

These questions should be asked....but have never been asked. Why ?



In reply to by IH8OBAMA

knukles Bes Fri, 01/05/2018 - 19:47 Permalink

"Short Vol"? 
Duration, convexity?
Appears the Dude knows what the fuck he's talking about from a finaincial standpoint and appreciates behavioral economics as opposed to the models that never worked but we'll use them anyhow
Behavioral finance:  To wit:  Mr MSM talking head says that the rising market is going to lead to bang wallop major economic expansion as the wealth effect takes hold with Joe Household thus then increasing spending, etc.  
To which the Behavioral guy responds:  WTF you talking about?  The household equity ownership was wiped out in 2007-10.  There is no household effect as there was in the past.  The 1%ers, of course.  Not Joe Plumber.

Long popcorn and 2020 Ferrari new model production option

In reply to by Bes

MrSteve knukles Sat, 01/06/2018 - 09:55 Permalink

Why couldn't the JCB buy the bonds the FED will be Selling and use the bonds for margin collateral to boost the NIK225? Has not the JCB been buying up the ETF market in Japan to boost their stocks? If the dollar stays down, JCB buying USTs gets to be easy-peasy. Everybody's problems get solved. Or does convexity prohibit this?

The Behavioral Finance of Central Banks....

In reply to by knukles

veritas semper… Bes Fri, 01/05/2018 - 19:49 Permalink

It was a joke.

you probably have not read my comments regarding the Donald.Read them before accusing me.

I consider ALL American presidents as hired actors ,by the real power,to explain to the Sheeple that they still have freedoms,democracy,that voting counts,that R is different from D,blah,blah...Maybe JFK was more independent,but he is inconveniently dead.

The real power is the fusion of finance(the banking cartel) with the repressive apparatus(Pentagram,See Eye Ayy,En Es Ayy,etc).

See the current government structure(Goldman golden crooked boys and Pentagram murderous scum)



In reply to by Bes

LightBeamCowboy Bes Fri, 01/05/2018 - 20:25 Permalink

There is a beautiful scene in "American Beauty" where a plastic bag is being swept around chaotically on wind eddies in an alley. That's about how much control presidents have over the economy. I wish both left and right could admit that, and stop either placing blame or taking credit for effects that aren't there or aren't theirs to take credit for.

In reply to by Bes

Bes null Fri, 01/05/2018 - 21:15 Permalink

Decmeber 2015: “Remember the word bubble? You heard it here first. I don’t want to sound rude, but I hope if it explodes, it’s going to be now, rather than two months into another administration,”

January 2018:  Trump is quoting CNBC articles on how great the stock market is ......


nuff said

full stop

fucking morons around here


In reply to by null

Scuba Steve Bes Fri, 01/05/2018 - 22:15 Permalink

Puttin Lipstick on a pig you stupid motherfukker ... what more he suppose to do for retarded mutherfukkin liberal gay cocksukkin sheep like you. You fuks have done everything to try to stop the man and he is bitch slappin you back to San Francisco.

If he does nothing more than kick the magic nigger monkey back to Africa and hang the rotting corpse witch, then he can bloviate all he wants.

"Your health insurance monthly cost will go down and you can keep you doctor and plan"

Fuk-Off bitch.

But I digress.

In reply to by Bes

shuckster Scuba Steve Sat, 01/06/2018 - 13:08 Permalink

Don't bother getting mad at these guys Steve. Most of them are creepy old twats who just hang around hoping to glean flirting tips from the younger guys in order to pick up the 21 year old chick from work. That's what all old dude are into these days, putting their mothball smelling sacks on our women. Any "political" discourse you see here is just a smokescreen to hide their true intentions, which is to starve the younger generation of men to death and then scoop up all the hot female ass that's left over. I've tried reasoning with them - they hold no political loyalties - they are just as self serving as the politicians they lampoon and lambast. If they had any conviction they'd be moving out of the dollar and into alt currencies (they all hate the Fed afterall, right?), but they don't. They're just here to trade pussy hounding secrets with other oldsters while posing as politically responsible American citizens


And one other thing, you said that I agree with is this - Trump is doing great, he is great. He's bailing water out of a sinking ship while the rest of the crew smoke cigs and stick thumbs in eachothers' asses. Will he fail? Probably. Will I hate him if he does? Depends on how he goes down. If he goes down with the ship, I will respect and revere him. If he suddenly flies off to mars on a space ship as the world bursts into flames, I may hold my praise. But he's doing 180,000% better than any politician in the last 150 years. And probably better than any politician before that too. Naysayers can get fucked though

In reply to by Scuba Steve

Dolus NotApplicable Sat, 01/06/2018 - 07:25 Permalink

If he's willing to talk about QE and VIX in the open than what are they doing behind closed doors. I'm a Trump supporter but he makes a mistake touting the price of the DOW as a victory because when it crashes it will be his fault too. The next FED chair will have a lot of pressure to keep the market up or if it starts to go south watch out! War will be on the horizon...not Trump's fault. 

In reply to by NotApplicable