Notes From Underground: “Do You Presume To Criticize The Great Oz?!?!” (Or Stanley Fischer)

When Janet Yellen delivered her speech on Friday morning the markets reacted to the dovish overtones via buying of SPOOS, GOLD, BONDS and selling the U.S. dollar. The initial action was less muted as the algo headline readers first though Chairwoman’s words mildly HAWKISH, but as key words were measured in context the sense was Yellen was being dovish in not leaning toward a September rate increase. Yellen did give us a significant barometer of data measurement. It seems that 190,000 increase over a three-month moving average is the FED‘s BOGEY. This Friday’s estimate is 180,000, which now puts more pressure on its importance because of September’s FOMC meeting. As usual, Yellen said,”… the economic outlook is uncertain, and so MONETARY POLICY IS NOT ON A PRESET COURSE,” (emphasis mine).

After the market’s adjusted to Yellen’s ambiguity, Vice Chairman Stanley Fischer’s unequivocal HAWKISHNESS replaced the Yellen DOVISHNESS. In a CNBC interview with Steve Liesman, the seldom right never in doubt Fischer said Yellen’s comments are consistent with a possible September rate hike and the Fed isn’t behind the curve. (It was Atlanta Fed President Dennis Lockhart who said the FOMC is set on a course of two more rate hikes before the end of 2016.) There are three meetings remaining–September 20/21, November 1/2 and December 13/14. If there are two rate increases to be had, it seems that September and December are most probable as I believe the Fed will not steal the headlines of the November Presidential election. It seems that Stanley Fischer is trying desperately to find relevance as his January prediction that FOUR RATE INCREASES WERE IN THE BALL PARK. We know that Fischer did not hit a HOME RUN with his January prognosis but is trying to salvage a double.

Some pundits spun the Liesman interview with Fischer as the Fed Vice Chair being the interpreter of Yellen’s words. We don’t know but I will say again what I have maintained all year: If the September FOMC vote is 9-1 Stanley Fischer ought to resign because his mouth is large but his voice is small and he has yet to vote his conscience. The FOMC vote numbers become a much more important measure for Yellen’s control of the Fed. My response to Fischer’s interview with Liesman at the Kansas City Fed’s Jackson Hole conference (from another Kansas iconoclast): “Pay No Attention to That Man Behind the Curtain.”

***In the body of Chairwoman Yellen’s speech were two paragraphs that seemed to directly appeal to our concerns here at NOTES FROM UNDERGROUND. I including both paragraphs because I feel they will be important for discovering  profit potential as we move forward in understanding FOMC actions. There is a great deal to ponder and coupled with Harvard’s Jeremy Stein’s Saturday paper presentation in Jackson Hole it will provide a framework for many blogs to come. (H/t to Dan Derose for his comment on Thursday’s post as it fits well with Professor Stein’s analysis.) From Yellen’s speech (note, points in bold are my emphasis):

“Two of the Fed’s most important new tools–our authority to pay interest on excess reserves and our asset purchase–interacted importantly. Without IOER authority, the FED would have been reluctant to buy as many assets as it did because of the longer-run implications for controlling the stance of monetary policy. While we were buying assets aggressively to help bring the U.S. economy out of a severe recession, we also had to keep in mind whether and how we would be able to remove monetary policy accommodation when appropriate. That issue was particularly relevant because we fund our asset purchases through the creation of reserves, and those additional reserves would have made it ever more difficult for the pre-crisis toolkit to raise short-term interest rates when needed.”

The FOMC considered removing accommodation by FIRST reducing our asset holdings [including through asset sales] and raising the federal funds rate only after our balance sheet had contracted substantially. BUT WE DECIDED AGAINST THIS APPROACH BECAUSE OUR ABILITY TO PREDICT THE EFFECTS OF CHANGES IN THE BALANCE SHEET ON THE ECONOMY IS LESS THAN THAT ASSOCIATED WITH THE CHANGES IN THE FED FUNDS RATE.EXCESSIVE INFLATIONARY PRESSURES COULD ARISE IF ASSETS WERE SOLD TOO SLOWLY. Conversely, financial markets and the economy could potentially be destabilized if assets were sold too aggressively.

INDEED, THE SO-CALLED TAPER TANTRUM OF 2013 ILLUSTRATES THE DIFFICULTY OF PREDICTING FINANCIAL MARKET REACTIONS TO ANNOUNCEMENTS ABOUT THE BALANCE SHEET. Given the uncertainty and potential costs associated with large-scale asset sales,the FOMC instead decided to begin removing monetary policy accommodation primarily by adjusting short-term interest rates rather than by actively managing its asset holdings. The strategy–raising short-term interest rates once the recovery was sufficiently advanced while maintaining a relatively large balance sheet and plentiful ban reserves–depended on out ability to pay interest on excess reserves.”

I will end this note by stating that 2013 is far different from 2016 and the Fed is missing a key factor. The BOJ, BOE and ECB are active buyers of debt–almost 200 billion dollars a month–and this could provide a major support to global markets as the FED moves to shrink its balance sheet. It is disingenuous of the Fed to note global headwinds but not provide the use of potential tailwinds from the massive QE programs of other central banks. The Jackson Hole 2016 produced more questions than answers and I promise more work to follow, especially as I juxtapose the work of two economists I respect: Jeremy Stein and Richard Koo. I will be closely watching the Yellow Brick Road as we presume to criticize.

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16 Responses to “Notes From Underground: “Do You Presume To Criticize The Great Oz?!?!” (Or Stanley Fischer)”

  1. Henry H Chan Says:


    Were the ECB, BOE versions of QE discussed at all at Jackson Hole?

    I do agree with your assessment that no rate hike is needed. Why bother with the hike at all if the economy is doing OK and inflation is under control?

    ==================== Yra’s:

    I will end this note by stating that 2013 is far different from 2016 and the Fed is missing a key factor. The BOJ, BOE and ECB are active buyers of debt–almost 200 billion dollars a month–and this could provide a major support to global markets as the FED moves to shrink its balance sheet. It is disingenuous of the Fed to note global headwinds but not provide the use of potential tailwinds from the massive QE programs of other central banks. The Jackson Hole 2016 produced more questions than answers and I promise more work to follow, especially as I juxtapose the work of two economists I respect: Jeremy Stein and Richard Koo. I will be closely watching the Yellow Brick Road as we presume to criticize.

    • yra Says:

      Henry–point is that the FED did not discuss the importance of the BOJ and ECB–two players absent when the Fed discussed tapering its QE

  2. Fred Ehrman Says:

    I would urge everyone who has the stomach to read Yellin’s complete transcript including the notes. It has something for everyone but you walk away feeling these geniuses don’t have a clue and events indicate they are way over their heads. There is no turning back in the road they have taken. Their is little chance to a return to any sense of normalcy in the economy with normal markets. This is getting so far removed from the rules of a capitalistic economy. It should leave you scared s——s.
    My take is that Fed Funds long term will not be much higher than they are now. QE is the main tool left in their so-called tool kit. See note 24. Wow!
    As Art Cashin is wont to say, be wary, nimble and I would add very very scared.

  3. Donna Lasater Says:

    Dear Yra, you will never disabuse me of the notion that this gov plus the FED are abusing the workers and savers of the previous generation. Yellen may be aware of this but she and the FED cannot do anything otherwise.

    • yra Says:

      Donna–I have no desire to disabuse you of the financial repression foisted upon the savings class to bail out the over-leveraged members of the economy.My job is to find profit opportunities in this tortured landscape .Now the ACA is going to raise a significant barrier to the purchasing power of the middle-class—-epi/pen is just the beginning—-so I think not to disabuse you at all.

  4. Blacklisted Says:

    In a world where the private sector is losing confidence in govts, it does not matter what the Fed does. It will become increasing obvious that liquidity is the problem. The Fed can drag the private sector to water, and the public sector can drink itself to death, but it CANNOT force a citizen to drink, unless they start giving away free booz.

    • Chicken Says:

      I’m getting the impression I live in government housing, considering they could evict me in favor of another tenant if they chose.

  5. Martin McGuire Says:

    Yellen’s remark about the ’13 Taper Tantrum being a ‘reaction to announcement(s) about the balance sheet’ might be a stretch. It was as much about Bernanke not having given any indication of ‘policy path’ with respect to the reduction/elimination of balance sheet. At that time and still, economic agents are hungry for any form of information that leads to a better understanding of the Fed’s policy path(s).
    Kind regards, Martin McGuire

  6. Thebigman Says:

    Let me preface this with a confession. I am a retired pediatrician trying to scratch out a retirement on my modest savings. I have never taken an economics course but do watch Rick Santelli religiously which led me to this blog (any friend of Rick’s is a friend of mine). Several years ago a switched to a low variable rate mortgage as I realized that the Fed would never be able to raise interest in any significant way ever again. I based this realization on empiric and rational reasoning just as I had when making medical decisions.

    First the empiric evidence: This experiment of the Fed’s has already been done by the Japanese who have been stuck at low and now negative rates for 2 decades. Despite the Fed’s hubris that we are smarter than the Japanese, having worked with many Japanese in my career, I know that I was not and Bernanke and Krugman aren’t either. Why is the Fed surprised when the same experiment is yielding the same results.

    Second the rational reasoning: Given the massive public and private debt that has accumulated as a result of financial repression how can the funds rate go back to 3-4% without bankrupting large portions of the economy private and public? It makes no sense. Interest on the federal debt alone will approach a trillion dollars a year at those rates not to mention the already distressed states and municipalities.

    As far as the fed mandates go lets take employment first. Case in point my daughter. Armed with her bachelor’s degree in economics from a good school she got an Obamacare job $25/hr but only 30 hours per week and no benefits for a small consulting firm dealing with EPA regulations. When it came time to buy health insurance from Obamacare, she took one look at the premiums and then quit her job, bought travel health insurance based on her age and good health for a fraction of the cost and is traveling in Southeast Asia until her savings run out. How does she get counted in the unemployment stats?

    As far as inflation goes, the Fed is puzzled why there is not more inflation despite all the sacrifice of trees and ink. Again to my naive ignorant reasoning there is no mystery. The fiat currency flood has not flowed equally to all but rather to a few. If you look at the goods and assets that the 1% buy, i.e. stocks, Manhattan and Hamptons real estate, private education, art from Sotheby’s etc. there is tremendous inflation the last 8 years. Not so much for the goods(he can’t afford assets) that the average joe buys as he/she is making less than a decade ago.

    So despite all the acronyms and algos, from my position in front of the curtain, I can’t help but believe there is a lot less to this than meets than eye. FWIW

  7. yra Says:

    tHE bIGMAN–GREAT POST AND HAPPY TO UNDERSTAND THAT THE fed IS NOT “CHILDS PLAY”—ALL THE POINTS you make are open to genuine discussion that Mr.Santelli covers quite a lot–yes when rates normalize the hit to the U.S. budget is going to be dramatic–do the math.The dual mandates are a ruse that is perpetrated upon the U.S. economy and the Fed waves them away whenever necessary–so thing happened in the U.K. with its inflation targets.When the fed wishes it invokes the third mandate of global headwinds which provides latitude to move the goalposts—my point of bringing up the role of the ECB and BOJ is that their massive QE programs provide a monetary TAILWIND for the Fed but because they operate in an assymetric vacuum they choose to disregard the impact of the ECB on global debt prices—the bottom line is the desire to raise in inflation to eradicate the debt burdens of so many—-the GOLD bears point to no inflation but my continued reasoning for Gold strength is that some investors understand that Gold is a barometer measuring the credibility of the central banks—-thanks for your post.And as you note,the coming economic shock to the middle -class from Obamacare will cause further stagnation in consumer demand–so Stanley you will never have it right

  8. Rob Syp Says:

    With the tax situation in play in the EU and are now looking into Amazon and McDonald’s. How will Apple and the others respond?

    These off shore profits or cash sitting outside American shores don’t they end up becoming vulnerable?

  9. Chicken Says:

    Good thing BOJ has been buying corporate stock, considering insider special interest groups need someone to sell to.

  10. kevinwaspi Says:

    Economics is more psychology than anything. To quote Yra again in past “Notes”, “Economics is NOT ROCKET SCIENCE”. The gang of central bank wizards do not believe this. Greenspan was never due the “admiration” he had when the propeller heads thought they had figured out a way to suspend the business cycles, and they constantly try to regain that misbelief. That worked out well now didn’t it?

    Economics is a SOCIAL SCIENCE, it starts with an hypothesis, then tries to find data to reject the hypothesis (statistically), and only when it is able to do so, it may advance to a Theory. There is ONLY ONE LAW in economics, unlike the hard sciences that have Ohm’s Law, Boyle’s Law, and Newton’s Laws. There is no way to test the counterfactual. The only “law” in Economics is the “Law of Unintended Consequences”, the fact that when you “do something” unknown, unexpected, and (usually) very counter-productive outcomes will result. Economics is all about human interaction in transactional space. Reactions to stimuli are seldom predictable. “Models” cannot fathom this fact, much less incorporate it. Yra, keep up the good work, we all need to “find profit opportunities in this tortured landscape.”, for it is very tortured, indeed.

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