In the Beatles Album “Let It Be” John Lennon introduces the phrase, “Doris Gets Her Oats.” It’s supposedly just typical Lennon gibberish. But in a nod to the Beatles, Janet Yellen got her oats and the Fed did not LET IT BE. The “oats” that Janet got was that the FED increased its interest on excess reserves (IOER) to 50 basis points and overnight reverse repo (O/N RRP) rate to 25 basis points in order to pull the fed funds into the corridor. The most astounding outcome was that FOMC vote was unanimous, 10-0. With the recent über-dovish comments from Fed Governors Brainard and Tarullo, how could they have voted with the Fed Chair? Some commentators remarked that the “historic” occasion of Yellen presiding over the first Fed hike in almost nine years needed a unanimous vote. Question: What did Chair Yellen have to promise the über-doves in order to garner their votes and suffer the wrath of the Shadow Fed Chairman, Larry Summers? This will be an important question going forward for it may mean that Yellen may have compromised herself to lower for longer.
The FED also announced that it will make available more than $2 trillion of U.S. Treasuries of its balance sheet assets to ensure the O/N RRP facility operates in a smooth manner. At first thought I perceived this to be hawkish but as Danielle Booth wrote today in a piece titled, “The Fed Awakens”, the increase of the O/N RPP protects the FED from having to shrink its balance sheet, which would be the ultimate hawkish move.
The markets’ response to the FOMC move was predictable in that the equity markets sharply rallied. But the GOLD, SILVER and CURRENCIES were left dazed and confused. As I have suggested, the Friday closes will be more important than the algo-driven immediacy of market volatility. The YIELD curves will help shine a light on some of the uncertainty but I advise being patient.
The ECB still has plenty of QE to do for the month of December as European sovereign debt yields have risen as the ECB waited for the FOMC to make its determination. Volatility has been the theme of the fourth quarter and now that we are in the final stretch of the year and with so many fund managers nursing poor annual performances be cautious about erratic movements aided by a lack of liquidity-inspired holiday markets. I will try to right an extended piece before Monday.
***NOTE: I recorded a web posting for the Financial Repression Authority with Gordon Long. The link is below and I know the response to it will not be unanimous.