Notes From Underground: Fed Up With the FED

More of the same from the mouth of the FOMC. Monetary policy has replaced fiscal policy as the “only game in town” and this has ENABLED Janet Yellen to be the final arbiter of all things in financial valuations. The concept of the dual mandate has morphed into a triple mandate as the turmoil of the global financial system weighs heavily upon the Fed’s ultimate decision to raise interest rates a mighty 25 basis points. Ms. Yellen sits upon the throne of financial power wielding a trident as she decides the fate of a “global sea of liquidity.”

Inflation not high enough, hold rates at zero. Employees desiring to work full-time but cannot get the needed hours. Labor conditions index does not warrant a rate increase even if hourly wages are pushing higher at the fastest rate in years. If the previous mandates are being achieved, we have to “be attentive to the negative spillovers from international events” for we don’t wish to have global problems create a needless misunderstanding.

No question, the Fed is trapped by its fear of upsetting the financial markets as they did with the infamous “taper tantrum” in May 2013. The fear factor, however, is getting old and the market’s response to the tripe offered by Yellen in her press conference was met by the market’s “rational exuberance.” At first the market reacted to the Summary Economic Projections (SEP) and FOMC statement with the previous correlative trading.

The DOT PLOT was diagnosed as projecting a possible outcome of two rate rises before the end of the year. The initial response was a moderate dollar bid, the interest rate futures being sold and the already-soft precious metals market remaining offered. The traditional market response performed a total rethink about the FED and the U.S. dollar sold; gold and silver went bid, and, the most telling of all was the late dramatic move in the U.S. yield curves. The greatest move was the 5/30 as the U.S. five-year futures rallied and the 30-year contract remained on the offer. The 2/10 curve exhibited a steepening but not as dramatic as its more speculative cousin.

This is only an initial reaction, but if it sustains itself for the next few days–further steepening with a weak dollar–the FED will have a problem. Its credibility will be at risk but I caution that this will be a process to be played out over time. The GOLD market is technically in bear trend and most large hedge funds are short GOLD as Greece and Russia have not provided any support for the GOLD bulls. But it may well be the “Fed’s credibility factor” that buoys the bulls. Interesting trade dynamic was the SPOOS as the equity market performed as expected as the weak dollar and the steepening curves gave new fuel to the equity bulls. By the close the SPOOS had surrendered its initial bullish response. Again, these are indicators that need to be watched to determine if the market is as FED UP WITH THE FED as I am. Janet Yellen needs to dust off  FDR for “there is nothing to fear but fear itself.”

***There were two major points Yellen made that caused me renewed concern:
1. In response  to a question posed by Steve Liesman about the Fed’s dual mandate, Yellen stressed that much of the decision about when to raise rates is a JUDGEMENT call. This confirms the idea that the FED is not scientifically based but is merely a group of frustrated mathematicians posing as rocket scientists. If it is calculated judgement how in fact do you know when you are wrong? A $4.5 trillion balance sheet hinging on the JUDGEMENT of a cloistered group of academics with no market experience. Chair Yellen emphasized in her response to Liesman, there is no simple indicator so the reliance on the dot plot is merely for the lazy analyst (my words and opinion).
2. Then there was a question about whether the FED should be concerned about rapidly rising rents and housing prices. Yellen’s response was worrying: Rising housing prices were restoring wealth to homeowners and thus increasing their spending power by improving their financial condition. Besides, credit mortgage availability is still quite constrained so there is little need to worry. This should cause concern among all credit investors as the Fed will continue to err on the side of wealth creation techniques. Rising home prices evidently will again provide the wherewithal for increased consumer demand, which has far greater staying power than falling oil prices. Don’t worry; be happy. And yet again, those complaining about the zero rate impact on their interest earnings should stop crying and be uplifted that the lower rates have provided for a better economy and a secure job situation.
The Fed will continue to financially repress lenders and reward borrowers through ultra low interest rates. Yellen’s statement on housing may be an indicator that the FED will remain in stasis for longer than I ever believed. And the big, bad wolf huffed and puffed and blew down the straw house.

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10 Responses to “Notes From Underground: Fed Up With the FED”

  1. kevinwaspi Says:

    Yra,
    You are guilty of succinct and insightful analysis again. The intellectuals have shown their hand more than any “forward guidance” ever could: They have a single mandate, that of fearing the implosion of the bubbles their policies have created. Savers be damned, thank us for the ability you have to work a second job at McDonalds, for without our academic omnipotence, you wouldn’t have that first job at Starbucks! All praise for the gods who can solve for equilibrium in N dimensions!

  2. asherz Says:

    Yra-We may have had a small disagreement yesterday on the cause of the Papandreou departure, but we’re in total agreement on your analysis today.The shallowness of the last 3 Fed chairperson’s thinking that has caused three bubbles in the last 15 years, makes one question the wisdom of the creation of the Fed over a century ago. The current bubble is by far the biggest and the fallout will be unprecedented. The phoenix that will arise will hopefully follow the Austrian School of economics, and not the Ponzi school (take from the saver and give to the borrower to keep the game going) of deception and obtuseness. Market dictated rates are no longer an option without causing a total meltdown whose ferocity will no longer be quenched by the monetary tools that have been so ineptly used. The current breakdown of the dollar and surprising strength of the Euro in the face of a very possible Grexit and its repercussions, is validating your premise of dissipating Fed credibility and omnipotence to solve all problems, and lower rates leading to an automatic buy the markets will be coming into question. The survivor will not be Queen Neptune with her Trident ( I liked your metaphor), but King Croesus and his gold.

  3. Joe Says:

    Prior to Yellen’s news conference, during an interview on Fox Business channel with Cavuto, Paul Volcker stated that we CANNOT grow an economy with ZERO % interest rates. Some of the braver financial “journalists” might take a cue from Volcker to put a little more constructive criticism of the FED into “mainstream” commentary, i.e. cable financial news channels.

    I thought one thing glaringly missing from the Q & A was any question regarding the FOMC leaks which will prompt a round of congressional hearings that will likely go nowhere. Notably missing was Pedro da Costa from the WSJ who has reported on the leak. The most pointed question was concerning rents and housing prices. I wonder whether that reporter will be readmitted to Yellen’s next press appearance. I also wonder if Treasury sent over an IRS agent to stand in the back of the room. Otherwise why would journalists not practice journalism?

  4. yra Says:

    joe—I was waiting to see if some of the financial media sycophants were arrested for “aggravated pimping”

  5. yra Says:

    http://www.zerohedge.com/news/2015-06-17/today-financial-journalism-suffered-epic-failure

    • Chicken Says:

      Except for the indisputable fact there is no basis in fact, b/c the FED chair said so. Case closed and class dismissed. 🙂

  6. Blacklisted Says:

    Yra, “Its credibility will be at risk” – what credibility? As you pointed out from Yellen’s response to Liesman, the Fed has no credibility amongst sober beings. Besides, the Fed is only consequential at the margins, as reserve flows swamp anything the Fed thinks they can do, witnessed by the fact they have never been able to halt even one recession. The last thing Yellen (or Obama) need to do is dust off FDR. The first thing that should be dusted off is JCCJ, as in John Calvin Coolidge Jr. It may help them recall that “the business of America is business”. Forgetting this truism will force a dignity upon those in govt that will prove quite challenging – “There is no dignity quite so impressive, and no one independence quite so important, as living within your means” – Calvin Coolidge.

    Whether Yellen truly believes her own thesis on RE and the wealth affect is immaterial. Anyone making decisions on what she thinks and says deserves what they will get. Rents are rising because people can’t get a mortgage or don’t want the movement restriction when housing prices collapse again. Housing that requires a mortgage is under assault by a broke govt (like most things), desperate to hang on to power.

    Ask those trying to get a mortgage about the increased paperwork and need to justify all their cash flows in and out of their bank accounts. Our self-centered govt will destroy the core RE market, just as they are using FATCA to shut down global capital flows. When the economy turns down again at the end of the year, the perceived wealth of homeowners will vaporize. What she should be counting on is the wealth affect from stock investors.

    Finally, if the Fed hopes to be able to raise rates predicated on employment or international stability, it better get a move on. It will be impossible to save face by the end of the year. Look for a forth mandate – “the Fed shall insure it cannot be blamed for asset bubbles”. Of course, it will also fail on this mandate. To save its infamous reputation, it will raise rates (thinking it can prick the bubble in stocks), and blow bubbles in anything with intrinsic value (including company stocks), which does not include govt debt.

    asherz, “The current breakdown of the dollar and surprising strength of the Euro” – the performance of the dollar over the last year (my definition of short term), and even the bounce over the last 3 months does not constitute a “breakdown”. The rising dollar trend will reassert itself with a vengeance come Q4. Just as King Croesus had the Persians to worry about, gold hoarders will have govt sociopaths that think they can once again outlaw gold to prevent people from preserving wealth.

  7. yra Says:

    Asherz–thanks for the nice rebuttal and disagreements are what drives learning–as I like to believe–this is not about validation but discourse

  8. Rob Syp Says:

    Buy the Spoos and hold your nose…. it sure worked today!

  9. ShockedToFindGambling Says:

    Yra- Good analysis.

    The major mistake the FED is making is assuming that ZIRP helps keep the economy afloat.

    As I have stated ad nauseum, at this level of interest rates, and at this point in the business cycle, raising rates (or letting Fed Funds float) will strengthen the economy by increasing consumer income.

    I think the FED keeps going back to the Depression experience, and blindly believes that any raise in rates will hurt the economy.

    If you think about it, most of the borrowers have refied, so it is time to help the lenders/savers.

    The FED has stalled on a 1/4% rise for at least 2 years,

    1/4%…..We’re talking about practice.

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