Notes From Underground: To San Fran FED President John Williams, TAPER THY MOUTH

The markets were tossed back and forth again today as the sudden ubiquitous Fed President John Williams was letting the world know his views about curtailing the Fed’s bond purchases. Why is the Fed’s newest voice busy spouting about the bringing forward  tapering of bond purchases? It seems that Williams has decided that the U.S. economy is entering a virtuous cycle of rising home values, creating increased demand for autos and other large priced consumer durables. And then let’s add in the steady rise in equity values, as well as the repaired balance sheet of consumers, which will lead to job creation and possibly inflation. The question arises: Why does John Williams’ opinion carry so much weight? Because of his previous role as a DOVE on the FED board?

More important shift is the focus of St. Louis Fed President James Bullard, who has become a new disciple of increased bond purchases as he fears inflation being too low. Bullard has been a much more credible voice on Fed actions. For me, I do not care a lick about what John Williams of San Francisco has to say. The St. Louis Fed has been a much more informed source on the issue of monetary policy. John Williams’ voice is an echo from a galaxy far, far away.

***TONIGHT at 11:30 p.m. CST the Reserve Bank of Australia (RBA) will announce its interest rate intentions. Last month, RBA cut the interest rate 25 basis points to 2.75%. Since the “unexpected” cut, the Aussie dollar has declined and, more importantly, the 2/10 yield curve has widened out more than 25 basis points. The RBA should cut again but I think they will hold off until July to see if the world’s financial markets have stabilized. Plus, the Australian elections are in September and the RBA will want to be sure of a genuine slowdown in the Australian economy or else they will be accused of playing politics. The short-term yield curve–overnight rates versus two-year rates–is still inverted so a RATE CUT IS JUSTIFIED, but it will keep its powder dry.

***In a speech delivered in Shanghai, Janet Yellen called for tougher regulation of short-term securities financing transactions (hat tip JB). In a quote from the speech: “A major source of unaddressed risk emanates from the large volume of short-term financing transactions (SFT)–repos, reverse repos, securities borrowing and lending transactions, and margin loans–engaged in by broker-dealers, money market funds, hedge funds, and other shadow banks.”

I have warned that if the FED was going to allow the trillions of dollars of bonds on its balance sheet to ROLL OFF, then the FED would have to become much more aggressive in the realm of macro-prudential regulation and significantly reduce the capacity of large-scale leverage created by financial engineering. Vice Chairman Yellen has fired the first shots in communicating the Fed’s intentions. Is Wall Street listening? (NOTE: The SEC is expected to introduce money fund reform proposal this week.)


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5 Responses to “Notes From Underground: To San Fran FED President John Williams, TAPER THY MOUTH”

  1. kevinwaspi Says:

    For an interesting look at John Williams work and thinking, see:

  2. yra harris Says:

    Professor –thanks for the post of even more info –food for thought

  3. Mario Says:

    Anyone have a strong read on the fixed income world that incoporates the derivates market such as FNMA and GNMA creation of pools, metircs, yields and valuation etc?

  4. yra harris Says:

    Mario–the classic text was written by my friend Fred Arditi[rest in peace] it was the main textbook for many upper level finance classes

    • Mario Says:

      Thank you Yra….I will give it a look…Appreciate the time you take to write this blog.

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