Shootout at the Rate Hike Corral

At long last, the big day is finally here.  For nearly two years, Macro Man has been operating off of a playbook in which the Fed more or less follows the timescale (and verbiage) of the previous transition from easing policy (in June 2003) to hiking rates (in June 2004.)  According to his template, the Fed is supposed to hike rates a year after the last easing- which in this case would mean October, 12 months after the final QE asset purchases.

Of course, given the sensitivity to the lift-off, he presumed that the Federales would wish to make the first move at a quarterly meeting, thus providing the cover of a forecast round and a regularly scheduled press conference, etc.  He had thus forecast a September hike, because September is closer to October than December is, and frankly he cannot completely discard his normative view that ditching ZIRP is way overdue.

As mentioned recently, however, he has to concede that as much as he would like the Fed to move today, the events of the last month make it appear somewhat unlikely that they will do so.  Nevertheless, there are a number of points about today's announcement that bear watching:

* The rate decision.   Yay or nay?   This is an obvious binary question of whether they hike or not, and will be the first thing reported when the red headlines hit the tape.

* The wording around the decision.   Does the Fed indicate a willingness to move should financial market volatility recede?  Do they still hang their hat on inflation moving up (more on this below)?

* Growth and inflation forecasts.  Data released since the last forecast round suggest that growth estimates will be moved up and unemployment forecasts may be nudged down.  Headline inflation, however, will be moved down on commodity price weakness.   Core CPI, at least, has been relatively stable at levels just below the core PCE target.   Will the FOMC nudge down its core inflation forecasts to "compensate" for higher growth forecasts so as to justify unchanged rates?

* 2015/16 dot plots.  Assuming no hike, it seems reasonable to expect the central tendency of these to be moved down, perhaps substantially.   Will the market once again rally to price in substantially less than the FOMC "forecasts"?

* Long run dot plot.    Consensus is in close to universal agreement that these will be marked down substantially to soften the blow of any lift-off that the Fed may begrudgingly do before humans colonize Mars.

* The press conference.  Obviously Yellen can provide some nuance in her remarks and in a softball question or two from pet journalists.  Consensus seems to have coalesced around either a "hawkish unched" or a "dovish hike."  Any deviation from that message will put the cat amongst the pigeons; the risk, it would seem, is skewed towards a dovish unched, given....well, the evidence of the last six years or so.

Regular readers will know that Macro Man has the view that the Fed (and other monetary authorities, for that matter) have an overgenerous view of their ability to influence and induce inflation given the secular trends in place in the global economy.  It's an article of faith amongst observers that the Fed PhDs, particularly Bernanke, have studied Japan and the Depression and wish to avoid the mistakes of others/the past, etc.

That's all well and good, and policies have been in place for a long, long time to ensure that those outcomes will not occur.  Perhaps some at the Fed really are concerned of a slip into corrosive deflation.   If so, they may need a refresher of what corrosive deflation really looks like (hint: nothing like we've seen in the US.)


Hey, here's a fun fact:  if we calculate the trend in core CPI from 1996-2005 (more or less a full economic, market, and policy cycle) and extrapolate it forwards, we find that the level of the core CPI index is actually a little too high- in other words, we've had a little too much core inflation!  Of course, if we manipulate the base period by a year or two, we can achieve a result that suggests that the current level of core CPI is a little too low.   Ultimately, this probably tells us more about arbitrary definitions of the "right level of inflation" than it does about anything else.


Another canard that's often trotted out is that the Fed does not want to repeat the mistakes of the Depression, and thus needs to avoid tightening policy.  I'm sorry, but anyone who is still wheeling that one out is talking either their (leveraged) book or complete bollocks.  The post-GFC era looks literally nothing like the Depression.  Perhaps that's because of QE/ZIRP, etc, perhaps it's because there was a globally coordinated response to the crisis, or perhaps because there wasn't a trade/tariff war as there was in the 1930's.   Either way, the performance of both equities/earnings and inflation have been radically different this time around than they were following the Depression.

At the equivalent point in time, neither stocks nor CPI had come anywhere near their pre-crisis peaks...and the Fed had already tightened policy.  These days, both the SPX and CPI are comfortably above their pre-crisis highs...and have been for a long time (especially CPI!!!)

Macro Man hopes that readers will forgive this digression, but he really feels that it's important to recognize that the drama of the real economy impact of a modest lift of interest rates is really quite overblown.

Of course, there may be financial market blowback that impacts the real economy.  However, if that's the case, it's hard to see how delaying and allowing imbalances to grow even further makes any sense whatsoever.  But naturally, you've heard all of this before in this space and elsewhere, so there's no real need to carry on.

In closing, Macro Man:

* thinks the Fed should hike
* expects them to bottle it
* agrees with the consensus take that the Fed will attempt to "sterilize" the rate decision by leaning the other way in its commentary
* but remains fearful of a straight up dovish slant
* will look to fade any strong rally in the very short end
* struggles to muster any conviction in equities, other than a jaundiced view that the market will try to separate as many punters from their money as possible in the aftermath of the decision

You can almost see punters and FOMC members moseying through the town of P/L Tombstone for a Shootout at the Rate Hike Corral.   Many enter, but few leave.  Who will it be?

Good luck. 
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Anonymous
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September 17, 2015 at 11:58 AM ×

deeeeep otm ewz Oct calls is the hedge for no hike/dovish tone you fear. For what it is worth ML FM report shows cash levels back at Lehmann highs. EM FX/Equities and commodities are most hated areas, EWZ combines all 3 and will continue to rally extremely hard if we get that. Although it is a basket case long term.

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Nico G
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September 17, 2015 at 12:50 PM ×

mr T

allow me to elaborate here regarding my short positioning. I need 1/2 in place before announcement, and it is already in place at 1986, because i could not believe how lucky i was to get so near the 1990s

1) before announcement indeed
2) knowing 1840 was traded last month and that a top is in place (i give it a 99% probability)
3) having seen the colossal 1990s rejection already (which i traded short on the Estoxx side of the Atlantic)

always interesting to discuss trading styles here.

People wary to short are never short. Simple. Noone had time to short last month. If you ever wanted to trim longs and/or go short after the August surprise, this bounce into Fed is the golden opportunity

yes you might enter 10/20 points above, on a stop run above 2000 right after announcement, which is what the other 1/2 is waiting for but imagine it just goes right down: you have just missed a telegraphed third leg down, and you won't be comfortable to short lower where all the ghosts may see a dip

good luck !

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Booger
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September 17, 2015 at 1:35 PM ×

Nico, I agree with the idea to short into a move higher, but my strategy will be to wait as I think there will likely be a pop to 2020-2050. I think I should be able to get a fill at those levels in the spaz move before and immediately after. But there is a risk I may not get that as you mention.

MM, it is very predictable, the Fed will do what the Fed funds futures say the week before! They have not surprised the market since the 1990's (?1994), so how could this, the most dovish Fed ever, possibly risk sp00king the market in any way, by a "surprise" hike.

Perhaps, when you are a billionaire, you could start including videos on this site, comedy sketches perhaps. I could imagine a good parody of the current meeting with a waiting for Godot skit. Or maybe one where the super geriatric members are in a huddle wearing John McEnroe type sweat bands on their heads, one is saying "let's do that 0.25cm hike today", and Yellen is on the potty exclaiming "I want to do it, but it's too risky...".

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Rossco
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September 17, 2015 at 1:45 PM ×

Really good post man , (macro man) but booger , your post is just gold. A bunch of ego driven geriatrics sitting around pontificating about their vive affecting millions outside of their bubble. Really.....you couldn't make this shit up.

given how light positions are, tend to think the first move is the wrong move - no original thought provided sorry

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September 17, 2015 at 2:51 PM ×

The Hilsenrath interview is worth a listen for those trading ahead of the fed. Titled: it looks like fed won't hike

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CV
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September 17, 2015 at 4:43 PM ×

Who says MM isn't already a billionaire :) ... ho hum!

Anyway, on the Fed. The best for the market, I think, would be a dovish hike which would likely be a VERY dovish hike. It does seem to me, though, that a lukewarm "unch" will be what we'll get. I would love to see short-rates have a seizure here, but I have stopped believing in it, I have to say. A couple of overall points, though.

1) The 2s10s inversion was the old recession signal; the 2s5s is the new one. I.e. terminal rates will be lower in this hiking "cycle"

2) Short Spoos, EM, etc at your leisure chaps, but I am calling your bluff. In six months, passive beta chasers will be feeling a lot better. Sorry, thanks for playing. This is not the time for the big short. Energy and EM to outperform.

Alright then ... que sera, sera as they say near LB's hammock ;).

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Nico G
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September 17, 2015 at 5:27 PM ×

let's keep it very simple CV: EM will get nuked by the rate hike, there is no relay there, and cheap energy is here to stay

to boot my timeframe is incredibly shorter than yours: a few days, 1/2 weeks max i am not patient enough to macro punt with a 6+ month horizon (unless I'm dragging losses :D

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Anonymous
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September 17, 2015 at 5:30 PM ×

I hear on financial twitter that Jon Hilsenrath has leaked there will be no rate hike tonight...

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Mr. T
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September 17, 2015 at 5:45 PM ×

One other idea making the rounds is 'unchanged with references to other policy tools' - the implication being that they don't want to hike now and the 'no ammo' canard can be dealt with by employing non-ffr tools. Yet another wildly bullish outcome.

With lower than even normal pre-fomc liquidity I think the reaction moves could be quite large.

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washedup
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September 17, 2015 at 6:09 PM ×

T - i heard that too - whats non FFR tools in ur opinion? A veiled reference to QE 4 if needed?

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washedup
admin
September 17, 2015 at 6:22 PM ×

Holy MOG - they are about to buy junk energy credit and put it on the balance sheet aren't they!
Thanks for that article T.

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Anonymous
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September 17, 2015 at 6:30 PM ×

USD falling, stocks spiking... the shorts are gonna get squeezed...

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Nico G
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September 17, 2015 at 7:04 PM ×

you folks got your rate hike and i am having the one big last laugh on this one

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Nico G
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September 17, 2015 at 7:14 PM ×

apologies from instant reaction it looked like a hike

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Anonymous
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September 17, 2015 at 7:14 PM ×

yeez new dove time high

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Anonymous
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September 17, 2015 at 7:19 PM ×

Nico, how's the short treating you?

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Polemic
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September 17, 2015 at 7:20 PM ×

Nico would you like the administrator to remove the last two comments instead of leaving them there for posterity?

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Anonymous
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September 17, 2015 at 7:23 PM ×

This reminds me not to trade right after the fomc statement and just sit tight.

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Anonymous
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September 17, 2015 at 7:24 PM ×

No rate hike - as foretold (continuously) by FunnyMoney for the past 9 months.

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Polemic
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September 17, 2015 at 7:25 PM ×

Well one FM, you and 66% of the market were right ..

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Nico G
admin
September 17, 2015 at 7:30 PM ×

short is awesome thanks i was really hoping for a slice of 2000 stop run to double - might still come in a minute

Pol those comments are here to stay i saw 1979 on the tape and was actually laughing. i am happy to entertain here

we speak again at 1950

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Polemic
admin
September 17, 2015 at 7:34 PM ×

Good for you Nico. Respect.

Have to say the amount of 'Unchanged' on SPX is remarkable. .. so far. Thought we'd be off to the races one way or another by now.

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Anonymous
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September 17, 2015 at 7:35 PM ×

polemic - Well one FM, you and 66% of the market were right ..

i almost threw up from laughter! made my week...

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Nico G
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September 17, 2015 at 7:36 PM ×

high gamma burn rate indeed

Fed just showed they are scared shitless. This is really not dovish, it is just catastrophic for the capital markets at large

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Macro Man
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September 17, 2015 at 7:42 PM ×

It really is beyond absurd that they think the unemployment rate will be 5% or below and that ZIRP is still justified. They really have no intellectual credibility left. I tend to agree with Nico that this is not a good thing for markets, and find myself hoping that smug, mindless buyers of risky assets find their comeuppance sooner rather than later.

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Polemic
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September 17, 2015 at 7:43 PM ×

What about us terrified but none the less mindless buyers of risky assets?

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Ghost of FunnyMoney
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September 17, 2015 at 7:47 PM ×

"...find myself hoping that smug, mindless buyers of risky assets find their comeuppance sooner rather than later..."

I guess it's never popular being right ;-)

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Anonymous
admin
September 17, 2015 at 7:47 PM ×

Really, given US economy those that do not aknowledge this is dove time high are making a confirmation bias time high.

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Ghost of FunnyMoney
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September 17, 2015 at 7:48 PM ×

PS Did I mention my equity longs are doing well?

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Macro Man
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September 17, 2015 at 7:52 PM ×

No need to mention it, because you piss off as soon as they aren't

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Anonymous
admin
September 17, 2015 at 7:58 PM ×

What exactly is Gramdma Yellen's job?

Jawboning...

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Anonymous
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September 17, 2015 at 8:00 PM ×

No rate hike as foretold by LB since 2009..

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Ghost of FunnyMoney
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September 17, 2015 at 8:01 PM ×

@MM - I'd suggest the post history shows differently.

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Ghost of Nico
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September 17, 2015 at 8:08 PM ×

Nico is the greatest man alive. And he looks like Vincent Cassel

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September 17, 2015 at 8:09 PM ×

fed is done, put a fork in it...boxed in, hoping and praying

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Ghost of FunnyMoney
admin
September 17, 2015 at 8:14 PM ×

@Anon 8:00 PM - I don't doubt it, LB makes many good posts (as do several others)
@Ghost of Nico - I'd suggest the post history shows differently...

Have a good evening gentlemen.

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Anonymous
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September 17, 2015 at 8:25 PM ×

sell mortimer sell

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LB Fan
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September 17, 2015 at 8:32 PM ×

Tune out the Fed:

http://blog.kimblechartingsolutions.com/wp-content/uploads/2015/09/interestratefourpacktrendsdownsept17.jpg

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Nico G
admin
September 17, 2015 at 8:53 PM ×

classic Thursday pre-expiry top good luck to our fellow bulls who do not reduce bets/ trim portfolios here, the world has changed, the repricing of risk just began, you were warned in August.

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Anonymous
admin
September 17, 2015 at 9:08 PM ×

If I had 1 oz of brains I'd ignore credit, fundies, t/a & all else & go 100% short based on Fed chair having totally lost her mind

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Anonymous
admin
September 17, 2015 at 9:18 PM ×

FT: I would suggest the most hated asset class (along with EMs and base metals) i.e. PMs is about to have a fit on the upside
GDX Z5 calls look cheap

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Anonymous
admin
September 17, 2015 at 9:22 PM ×

VVIX just jumped 20 points in about 20 minutes...Market still nervous

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hipper
admin
September 17, 2015 at 9:24 PM ×

So it really never had a chance with the 9-1 vote despite the media on the edge talk. The same old story of more labor market improvement and laggy wage inflation following low UR and transitory oil recovery lag. But the point is if the proportion of part time jobs get bigger, then isn't there even less upward pressure for wages despite what the UR?

Will this mark the beginning for a longer term down on DXY? If so, Draghi and his cronies are going to need to get some more revs out of the printing press and they've been talking about it on a couple occasions already IIRC. What do ppl think EMs and gold here?

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Anonymous
admin
September 17, 2015 at 9:37 PM ×

The 5.2 million dollar bet that the Fed would not move...

http://imgur.com/DCny62k

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Polemic
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September 17, 2015 at 10:22 PM ×

my thoughts http://polemics-pains.blogspot.co.uk/2015/09/good-thats-out-of-way.html

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Anonymous
admin
September 17, 2015 at 10:32 PM ×

FED have gone full OPEC. The can't pull back now, they cornered the market but have now lost control. Didn't take their out when they had the chance.That never ends well.

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Anonymous
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September 18, 2015 at 12:58 AM ×

good god he is almost correct on all counts

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