Notes From Underground: When Fed DOVES Coo

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.


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7 Responses to “Notes From Underground: When Fed DOVES Coo”

  1. David Richards (@djwrichards) Says:

    Fact: Real estate prices across developed Asia ex-Japan are up 47% year-to-date.
    Inflation in Asia ex-Japan reads around 6%.

    The USD is in collapse this year by any historic measure.

    The performance of US assets badly lag the world on a currency-adjusted basis.

    Precious metals and many commodities have broken out. Even oversupplied crude is holding up. Soaring commodity prices guarantee a strong dose of inflation coming down the pike. Anyone who pays rent or buys food knows that real inflation already far exceeds the Fed’s inflation target of 2% or the BLS rate near 1%.

    This feels the start of this decade, when real inflation was soaring and the Fed doves ignored it all, while the dollar sank like the titanic. Let’s call this repeat era of roaring real inflation and a sick worthless dollar, Titanic 2. Good riddance to Brainard and Yellen.

  2. Rob Syp Says:

    A while back when the 10 year was trading 2.35 asked what will we see 1st 2.5 or 2.0 well we are 2.08 and have not touched 2.5.

    Yra, will you please walk us through your 10 vs 2 or 2 vs 10 yield analysis, thank you. I see it published both ways and what is the correct way to refer to the yield spread?

    And this analysis caught me by surprise yesterday it’s a reminder when prices are low consider buying and when prices are high consider selling

  3. Chicken Says:

    Stanley Fischer has resigned, now we get to see who he works for?

    • David Richards (@djwrichards) Says:

      He says “for personal reasons”, but is this actually in objection to the direction (less regulation) that the Trump Admin reportedly prefers for the Fed? Based on my read of the last sentence of Mr Fischer’s short letter of resignation to the President. Comments, anyone?

    • David Richards (@djwrichards) Says:

      I preferred Mr Fischer to the nominees that the press says Trump favours. I’d hoped that the Senate would reject Trump’s preference and then perhaps settle on the Vice. Kinda like how Yellen got the job.

    • Yra Says:

      David–I don’t think he resigned for that reason–more as I have opined that he has been displaced by Brainard as Yellen’s confidant–but just an opinion on my part.We got a double load with the WSJ report about Cohn not be appointed as Fed Chair

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