Never has so much money been riding on ONE WORD from a monetary authority. The issue isn’t the idea of FED PATIENCE in regards to raising rates for if the FED increases the effective rate to 37 basis points from 12 basis points IT IS MEANINGLESS. The issue for the FED is the huge pile of bank reserves sitting at the central bank to the tune of $2.7 TRILLION (and let’s not forget the FED‘s $4.5 TRILLION balance sheet). If the economy begins to heat up and banks begin to circulate those RESERVES, the FED will have a velocity of money problem as the ECONOMY MAY BE AT SOME LEVEL OF FULL EMPLOYMENT. It’s not an interest rate problem for the FED but a RESERVE PROBLEM.
The market was abuzz with a story from Bridgewater’s RAY DALIO, a man I hold in very high esteem and not because of his wealth but his intelligence in the realm of global macro finance. Mr. Dalio compares the present FED dilemma to the FOMC decision of 1937 when the central bank acted to raise reserve requirements and interest rates in an effort to forestall a POSSIBLE rise in inflation. Dalio believes the FED should be reticent and make certain the economy can withstand an increase in rates. Janet Yellen believes the same, which is why the FED will be data dependent rather than patient.
I think Dalio’s piece is flawed because he fails to mention that the U.S. Treasury under Henry Morgenthau was raising taxes at the same time as the Fed was tightening in an effort to balance the budget and curb deficit spending. As Richard Koo and other’s have argued, the Fed erred by not holding off rate increase until the effects of fiscal austerity were fully understood. Yellen can use the excuse of current fiscal policy as an effort to remain cautious for the Federal budget is certainly a major data point.
There has been an “underground” battle at the Fed between Chair Yellen and Vice Chair Fischer over the use of “FORWARD GUIDANCE” in setting FED policy. For the past three years Fischer has been voicing his skepticism about the use of forward guidance as he believes it binds the FED even when conditions change. Bind yourself to a time-set policy and it’s a recipe for falling behind the proverbial curve. If PATIENCE is removed wait for Chair Yellen’s press conference in which she will walk back the immediacy of rate hikes and will comment of the recent tepid economic data.
Yellen’s primary caution will be a signal about her rising concerns about INTERNATIONAL DEVELOPMENTS (code word for the U.S. DOLLAR) since the DOLLAR is the purview of the TREASURY. Complicating things for Yellen was the stupid comments today from that global ambulance chaser IMF DIRECTOR CHRISTINE LAGARDE that a FED rise in rates will be problematic for the emerging nations that have large DOLLAR liabilities. This is not a new issue for my readers as I directed you to the important BIS Paper by McCauley, McGuire and Sushko, titled, Global Dollar Credit: Links to US Monetary Policy and Leverage, which measures the amount of emerging market corporations and the debt they have in dollars. As the dollar rises against their domestic currencies the weight of the liabilities for those corporations increases.
It was WRONG for Ms. Lagarde to voice concerns during a FED FOMC meeting for it appears as if she is trying to influence U.S. domestic policies. If Yellen doesn’t remove the PATIENT guidance it appears as if the U.S. monetary authority is bowing to international pressure, which would call into question the DUAL MANDATE. Tomorrow’s trade is going to be extremely volatile because the market will react to the FOMC statement, though whatever movement takes place can easily be walked back by Yellen’s Press Conference. I URGE PATIENCE.
***The yield curves continued flattening today as the 2/10 has fallen to a 10-day low of 137 basis points from 152 basis points post-nonfarm payrolls as traders believe the impact of the removal of PATIENT and a possible JUNE hike in the FED FUNDS rate will flatten the curve, especially as inflation seems to be under control and recent economic data tepid at best. If YELLEN walks back any sense of a near-term tightening, the CURVE OUGHT TO STEEPEN after the recent FLATTENING. However, the movements will be sudden, violent and subject to the parsing of words.
If Yellen walks back an imminent tightening, the DOLLAR will also come under pressure as many recent longs will be bothered by Fed reticence to raise rates. Coupled with the BOND, DOLLAR volatility will be the precious metals. Today, GOLD sold off until strong support levels and in a 10-minute sequence went to $1158.00 from $1141.6 on the buying of 4,000-plus futures contracts. Gold sold off for the next three hours but the quick bounce on no news was a tell of the looming volatility the market faces with tomorrow’s FOMC release and Yellen press conference. Yes, I must say it. Get your technical support and resistance levels up and speed and be PATIENT.
Tags: Christine Lagarde, dual mandate, Fed, Fed Funds, FOMC, forward guidance, IMF, Janet Yellen, patience, Ray Dalio, Stanley Fischer, U.S. Dollar
March 17, 2015 at 5:51 pm |
Welcome back Ira.
There will be no serious rate rises as far as the eye can see, except for token ones totaling .25 or .50 basis points. Global deflationary pressures, dollar strength and most importantly an $18.1 trillion national debt and going much higher over the next few years, precludes much higher rates which would severely impact the national budget.
The silliness of parsing code words is risible but it is the game that the wordsmiths at the Fed have thrust on the financial markets.
Frankly I think a more entertaining event scheduled for next Monday is the meeting between Kirios Tsipras and Frau Merkle. I’m impatient to see what develops there.
March 17, 2015 at 6:02 pm |
Best “patient” related article yet.
March 18, 2015 at 6:18 am |
Welcome back Ira. does a 25bp/50bp point rise in rates have a notable multiplier effect on the blended interest rate the treasury has to pay to service its debt? If not at these levels, then what levels of interest are needed to make it a problem for the treasury for debt repayment? Many thanks, Costa
March 18, 2015 at 7:23 am |
Costa–good question and I don’t know but if the FED gets to the dot plot levels of normalization the budget deficit with increased interest costs is going to blow up the bond markets and with it the equity markets—success at full employment with huge reserves will force interest rates to rise dramatically—INCONCEIVABLE?
March 18, 2015 at 7:58 am |
Yra- To beat a dead horse, I think the FED will remove “patient”, because if they don’t, it will be a statement that they think the economy is weak.
That said, their comments will be so doveish, that they will more than offset the removal of “patient”.
I think you have it right. Although this whole exercise is fundamentally meaningless, it’s hard to predict what the psychological consequences of starting down the road to tightening, will be.
Almost all the economic stats in the USA have been weak for the last month (except for employment), and retail sales have been weakish for the last year.
2015 is 2008 on steroids…………instead investment banks juicing the economy with a relatively small $2Trillion of overpriced CDOs, central banks are juicing the economy with several hundred $Trillion of overpriced stocks, bonds, real estate, collectibles.
March 18, 2015 at 8:11 am |
Not inconceivable Yra, thanks!
March 18, 2015 at 8:18 am |
shocked —dead right on –the central banks have now moved in sync with different policy desires—how can it be wrong if everybody is doing it.The currency wars are on–see the Riksbank cut today and its rationale—-Hey Jack Lew–when will you think there is a currency war going on–this is more then monetary policy in each nation state
March 18, 2015 at 11:16 am |
Yra, is it possible US dollar policy is geopolitical rather than economic at this point in time?
March 18, 2015 at 12:18 pm |
Yra, would you short the 2-10 year spread after the dust settles? The 2-10 spread is tightening rather than widening as it should with the suggested policy action
March 18, 2015 at 12:54 pm |
Sure is nice to see “currencies gone wild” on FED day, mission accomplished!
March 19, 2015 at 8:30 am |
Instead of patient, they assured markets explicitly in the statement that there would be no rate hike in April. The Fed is still essentially “patient”.
March 20, 2015 at 3:51 am |
Jason–when you say short the 2-10 do you mean the curve should flatten or steepen?If you think a bear steepener ought to work then buying twos and selling tens at the appropriate ratio is in order–and yes I think that based on the FOMC statement that would be the right trade but as it has not worked since Wednesday afternoon I am waiting for the technicals to tell me—presently it is trading at a yield differential of 137 basis points and looks in the middle of its recent range—over the last year I noted that the important low on the 2/10 curve would be the low made the week of 7/24/12 when the European crisis was on full boil and credit markets thinking the entire Euro project would dissolve and 2/10 curves around the world were flattening as investors demanded safety and the world worried about EU funding problems–then Draghi sadi–“whatever it takes” and the day was saved—the low that day on the U.S. 2/10 –was 117 + steep—in the recent flattener the low again was 117 and then the curve reversed to 153 + as the tens and thirties were being sold—if the 2/10 U.S. were to trade under 117 and close there it would signal that something is weakening in the global and U.S. economy–I hope that brings some clarity –the parlance of widening and tightening is a little confusing—I prefer flat or steep
March 20, 2015 at 3:53 am |
Costa–it seems we got some clarity to your question about the geopolitical dollar
March 20, 2015 at 4:11 am |
Yes we did Yra. Thanks, all the best.
March 20, 2015 at 5:43 am |
[…] up the fundamental landscape. He’s laid out a road map for today that is well worth the read. http://yragharris.com/2015/03/17/patience/ As for me, I’m just a pragmatic technician who has no intention of playing a high stakes game […]