Notes From Underground

The FOMC doves were out today. Governor Lael Brainard and Minneapolis Fed President Neel Kashkari weren’t enough to prevent a selloff across global equity markets. The weekend brought louder noises from North Korea as Kim Jong-un revealed that the country had the wherewithal to place a thermonuclear warhead on an ICBM. In an effort to enhance the rhetoric it appears that the state detonated a thermonuclear explosion as radiation levels were elevated and a minor tremor registered on seismographs in the North Asian region. The world is on edge as the United States, China, Russia and the United Nations decide how to deal with the “rogue” nation, an irrational actor in a rationally modeled world. Maybe economics is not the only dismal science?

What happens with the continuing saga of Kim Jong-un is beyond the knowledge of Notes From Underground, but I offer up a very interesting article by Ankit Panda and Vipin Narang titled, “Welcome To The H-Bomb Club, Korea.” This is a very insightful discussion of possible outcomes for dealing with the rogue nation. Once we come to the conclusion that 20 years of sanctions have failed to curtail its nuclear ambitions it is time to deal with the desires of all parties. Diplomacy at the highest level is the order of the day.

Today, Governor Brainard and President Kashkari of the FOMC delivered speeches that were extremely dovish. Brainard’s speech I deem to be more significant as I believe her to be the sounding board for Janet Yellen. The key points from Brainard:

1. As fiscal stimulus seems less a possibility she is in no hurry to raise the fed funds level;
2. “Once balance sheet normalization in under way, I will be looking closely at the evolution of inflation before making a determination about further adjustments to the federal funds rate. We have been falling short of our inflation objective not just in the past year, but over a longer period as well. My own view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target.” Brainard adds that a recent Fed study “… suggests balance sheet runoff could boost the level of the term premium on the 10-year Treasury yield by about 40 basis points over the first few years”; and
3. It is important to “be vigilant to the signs that asset valuations be elevated, especially in areas such as commercial real estate and corporate bonds, as well as the exceptionally  low levels of expected volatility. NONETHELESS, there are few signs of a dangerous buildup of leverage or of maturity transformation ….” To poke at the Mnuchin/Cohn team she attributes the financial stability to the post-crisis financial reforms. To put the markets’ reactions to all of the above PLEASE NOTE ALL ASSET PRICES FROM NOVEMBER 9, 2016. More to follow on Wednesday.
   

Tags: balance sheet runoff, Dovish, Fed, inflation, Lael Brainard, North Korea

This entry was posted on September 5, 2017 at 8:18 pm and is filed under Fed, North Korea. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.