Posts Tagged ‘forward guidance’

Notes From Underground: Walking Through the Valley of the Shadow of Death

September 22, 2019

There is no question that the world’s central banks are all living under the shadow of doubt as investors and financial markets are questioning the efficacy of the zero lower bound. The sense of always doing more in an effort to attain a self-conjured 2% level of inflation has led to the continued downward slide in interest rates.

On this note, last week we saw the Powell Fed lower the target range for the fed funds rate by 25 basis points — and its interest on excess reserves rate by 30 basis points — as congestion in the financial plumbing sent overnight rates soaring. (For those who are interested in the nuances, I am linking to one of many splendid pieces from Bloomberg reporters Liz McCormick and Alexandra Harris detailing out the repo market mess.)


Notes From Underground: Fed Loses Its Patience While I Regain My Voice

March 17, 2015

Never has so much money been riding on ONE WORD from a monetary authority. The issue isn’t the idea of FED PATIENCE in regards to raising rates for if the FED increases the effective rate to 37 basis points from 12 basis points IT IS MEANINGLESS. The issue for the FED is the huge pile of bank reserves sitting at the central bank to the tune of $2.7 TRILLION (and let’s not forget the FED‘s $4.5 TRILLION balance sheet). If the economy begins to heat up and banks begin to circulate those RESERVES, the FED will have a velocity of money problem as the ECONOMY MAY BE AT SOME LEVEL OF FULL EMPLOYMENT. It’s not an interest rate problem for the FED but a RESERVE PROBLEM.


Notes From Underground: Nineteen Ways To Leave Your Lover

September 16, 2014

The reference of 19 ways to leave your lover is a reference to Janet Yellen’s Labor Market Condition Index (LMCI), which is what the Fed chair noted as the most important “dashboard” for measuring SLACK in the labor market. To achieve a true measure of labor market slack it is important for the Fed to dig deep into the statistical data of the unemployment report giving the Fed latitude in its decision-making. Remember, the Fed has twice moved the parameters of the jobs data as the different thresholds established by the Fed were breached quicker than anticipated. First it was an unemployment rate of 7 percent and then moved again to 6.5 percent. The threshold was then moved lower again as slack and its impact on WAGE PRICES was deemed to be the best measure of the health of the jobs market. If the Fed’s focus is wages then the FOMC statement tomorrow should be unchanged as the recent data has continued to reflect that wage gains are stagnant.


Notes From Underground: The Significance of Mark Carney’s Mansion House Statement

June 16, 2014

The FED meeting begins tomorrow and concludes Wednesday with a full-blown Janet Yellen press conference. The FOMC is expected to continue the path of TAPERING by removing another $10 BILLION of asset purchases but still continuing to add to its massive balance sheet. There is talk among the “pundits” about Chair Yellen raising the expectations of a FED move to increase interest rates sooner than the market predicts. Concern has grown because several FOMC members have raised the issue of  higher REVERSE REPO and IOER (INTEREST ON EXCESS RESERVES) RATES in an effort to drain some of the vast amounts of liquidity sloshing around in the banking system.


Notes From Underground: Why The Fed’s Forward Guidance Model is Flawed

March 17, 2014

A quick note before we enter the Fed’s two-day meeting. I am reposting a note from a few weeks ago when I conjectured that Chairman Yellen was not the keeper of the Greenspan Put. In the present realm of depressed wages, Yellen would err on the side of allowing corporate profits to soften if it meant an increase of wages for the middle level wage earner. Corporate profits as a percentage of GDP are at elevated levels because capital has been well rewarded from the effects of globalization while the massive increase in the global wage pool has kept downward pressure on wage rates in the developed world economies. Throw in the historical low borrowing rates set by the world’s central banks and the result is enhanced corporate profits. The FED has been enamored with the idea of “forward guidance” and went so far  as to put in a quantitative threshold as a measure of its commitment. The Bank of England has already dispensed with its numeric-based forward guidance and seems to have accepted a more nuanced and qualitative response to its mandate.


Notes From Underground: Just a Song Before I Go (Graham Nash)

February 13, 2014

I am going to take a well-deserved hiatus but I wanted to list some “quick hitters” on the issues facing the markets in the coming weeks. The Yellen testimony has been digested and regurgitated (ad nauseam) and the bottom line is Chairwoman Yellen is singing from the same hymnal as her predecessor. The stock market investors/traders are comfortable with a known known and as readers of NOTES are well aware markets appreciate as much certainty as possible. BUT I WARN EQUITY BULLS WHO BLINDLY FOLLOW THE FED LIQUIDITY MODEL: Janet Yellen is a labor economist of Keynesian predilections.


Notes From Underground: Subject: The Cure To the Fed’s Concern About Its Communication Strategy: Richard Fisher

January 14, 2014
Bravo, Dallas Fed President Richard Fisher. You gave a speech that even the talking heads on TV could comprehend. The speech, titled, “Beer Goggles, Monetary Camels, the Eye of the Needle and the First Law of Holes,” lays out the dilemma for the FED as it not only begins tapering but actually has to begin unwinding its massive balance sheet.

Notes From Underground: TOTO Is Out of Kansas and Back In Washington

December 16, 2013

Will TOTO bite the wizard behind the curtain? Toto, in this case, is not Dorothy’s dog but rather the market’s obsession with taper on/taper off, or TOTO. Today’s trading proved to be a “ball of confusion” as the market emerged from a relatively quiet weekend to open in a taper off mode as the bonds and equities were bid. The currency markets were relatively quiet as were the precious metals. Mid-morning, though, the long end of the Treasury curve began to sell off and the yield curve went from a flattening bias to steepening, which seemed to represent the market adopting a taper on bias. However, the currency and precious metals markets reacted contra to previous correlations and rallied as the yields on the long-end of the curve rose. (Again, very confusing in regards to recent patterns.) The BONDS closed toward the lows but the metals and equities held their rallies, which leads me to believe that the market has adapted to the idea of a Fed tapering being tied to a change in the language of forward guidance.


Notes From Underground: Does The Unemployment Data Allow The Fed to Taper?? (Yra Says 90% Possibility in December)

December 8, 2013

Friday’s U.S. jobs report was stronger than pre-ADP consensus, only because of several pundits pushing the idea of 250,000 non farm payrolls (the whisper number seemed to be around 225,000). Thus, the 203,000 NFP was well within the range of prediction. The falling rate to 7.0% was a stronger sign of growth, especially when coupled with a rise in the participation rate and a fall in the U-6 rate. Average hours worked gained and wages increased by 0.2% per hour. All in all, it was the most positive data in many months. Manufacturing was a pleasant surprise as 27,000 jobs were added along with 17,000 jobs in the construction sector.


Notes From Underground: Bored to Tears by the Global Macro News

December 1, 2013

It’s all good, so say the pundits. The tapering discussions have now moved to the issue of FORWARD GUIDANCE as Chairman Bernanke has maintained that at the zero bound interest rate FG may have more influence on rates than quantitative easing. For the Nth time, the FED is at a fork in the road and doesn’t know which path to take. A continuously steepening YIELD CURVE is an indication that the market is signaling its discomfort with the Fed. The rise in the longer end of the curve is causing the Fed a great deal of concern because their model seems to say that continued pressure on the short end will act to keep long rates low (unless, of course, the market is questioning the Fed’s credibility and rolling out of BONDS and into the equities). A key question for the FED: Are equity markets a better long-term investment (hedge) against the success of Fed policies?