What do you do when you're in a position of heavy responsibility and you haven't a clue what to do? For the Federal Open Market Committee, the answer appears to be "stick you head in the sand, do nothing, and hope for the best."
Beyond all the rhetoric, all the caveats, all the hemming and hawing, the underlying theme from yesterday's Fed announcements was "uncertainty", which is Fedspeak for "I'm sorry, I haven't a clue." Nowhere was this more amply demonstrated than in the way-worse-than-useless dot plots, where the 2016 median was unchanged, the 2017 median fell 25 bp, and the 2018 median fell 62.5 bps despite the only forecast change for the year being a 0.1% increase in the forecast unemployment rate.
And of course, if a 0.1% change in the 2 years out unemployment forecast were so significant, it rather raises the question why the relentless decline in the unemployment over the past few years didn't merit a meatier response.
If the point of the SEP is to illustrate the Fed's logic and reaction function, it failed.
If the point of the press conference is to clarify any confusion caused by the above, it failed. There are fewer waffles in Belgium than Yellen included in her "explanation" of why the 2018 dots fell.
Such is the Fed's impotence that Hilsenrath essentially challenged Yellen that the Fed couldn't fulfill even the lower dot pricing, as bond yields wouldn't permit them. Instead of replying, "actually, Jon, the FOMC sets the Fed funds rate where it wants and will do so at the level it deems appropriate. It's the market's job to adjust to the FOMC, not vice versa", she treated us to a lengthy discourse on why yields are currently so low. Somehow, "we've only raised rates once in a decade" didn't feature on the list.
Admitting that you don't know is actually very difficult to do, and many prominent financial disasters of the last few decades were the result of misplaced confidence in decidedly imperfect information. For the Fed, the mailed in GDP forecasts (2% as far as the eye can see) are a pretty good admission that they haven't got a Scooby.
Intelligent people are often reticent to make a decision when they know that they are armed with imperfect or possibly fatally flawed information. Yet deciding to do nothing isn't abstaining from a decision, it's making an active choice and sending an active signal. That choice and that signal both demonstrate a decided lack of confidence in the economy, a theme that has persisted for many years now (even when the data were rock-solid.)
That anyone can look at the goings-on in Europe and Japan and think that collapsing bond yields are an unalloyed positive is bemusing, to say the least. But it seems as if model prediction continues to trump empirical observation, to the likely long-term detriment of us all. In the meantime, wouldn't it be funny if the BOJ did something crazy (and not stupid) and undid all of the Fed's hard "work", vis-a-vis the dollar at least?
Beyond all the rhetoric, all the caveats, all the hemming and hawing, the underlying theme from yesterday's Fed announcements was "uncertainty", which is Fedspeak for "I'm sorry, I haven't a clue." Nowhere was this more amply demonstrated than in the way-worse-than-useless dot plots, where the 2016 median was unchanged, the 2017 median fell 25 bp, and the 2018 median fell 62.5 bps despite the only forecast change for the year being a 0.1% increase in the forecast unemployment rate.
And of course, if a 0.1% change in the 2 years out unemployment forecast were so significant, it rather raises the question why the relentless decline in the unemployment over the past few years didn't merit a meatier response.
If the point of the SEP is to illustrate the Fed's logic and reaction function, it failed.
If the point of the press conference is to clarify any confusion caused by the above, it failed. There are fewer waffles in Belgium than Yellen included in her "explanation" of why the 2018 dots fell.
Such is the Fed's impotence that Hilsenrath essentially challenged Yellen that the Fed couldn't fulfill even the lower dot pricing, as bond yields wouldn't permit them. Instead of replying, "actually, Jon, the FOMC sets the Fed funds rate where it wants and will do so at the level it deems appropriate. It's the market's job to adjust to the FOMC, not vice versa", she treated us to a lengthy discourse on why yields are currently so low. Somehow, "we've only raised rates once in a decade" didn't feature on the list.
Admitting that you don't know is actually very difficult to do, and many prominent financial disasters of the last few decades were the result of misplaced confidence in decidedly imperfect information. For the Fed, the mailed in GDP forecasts (2% as far as the eye can see) are a pretty good admission that they haven't got a Scooby.
Intelligent people are often reticent to make a decision when they know that they are armed with imperfect or possibly fatally flawed information. Yet deciding to do nothing isn't abstaining from a decision, it's making an active choice and sending an active signal. That choice and that signal both demonstrate a decided lack of confidence in the economy, a theme that has persisted for many years now (even when the data were rock-solid.)
That anyone can look at the goings-on in Europe and Japan and think that collapsing bond yields are an unalloyed positive is bemusing, to say the least. But it seems as if model prediction continues to trump empirical observation, to the likely long-term detriment of us all. In the meantime, wouldn't it be funny if the BOJ did something crazy (and not stupid) and undid all of the Fed's hard "work", vis-a-vis the dollar at least?
46 comments
Click here for commentsThe problem is that such inaction has eroded trust and faith in the system. The fed created these daft dot plots as one of the tools to help create clarity into their thinking, presumably to get everyone in line so there wouldn't be any market shocks and the transitions would be orderly.
ReplyHowever, market behaviour and reactions have started to move away from their prior norms. Previously, lower rates would have given a boost to equities and dollar backed commodities. However, equities took a tumble after Yellens speech, which if sustained, could signal underlying anxiety and a lack of faith in the overall system. A similar thing became clear when the BOJ introduced negative rates in order to stimulate their economy and weaken the JPY and it had the opposite effect.
To many traders and investors it is clear that negative rates create too much risk as participants are forced to move further out along the curve or chase IG/HY for yield. Left for too long the dangers only grow and chances of an orderly retreat diminish. I can picture it now, pension funds with 30year bond holdings at zero % yields and exposure to HY will be one of the many victims.
That anyone is still even listening to those pikers is the only thing grumble worthy. LB is right in the reaction. Long dollars. Reaction was discounted and we all know what comes after dovishness. I would add long GBP and TBF.
ReplyI agree with the sentiments expressed in this post.
ReplyIs there something bigger than a supernova?? my god what's going on about rates world worldwide...
ReplyYellen is more beautiful than clever... no more words about her
"Yellen is more beautiful than clever"
ReplyAre you writing the next Ad for "he should have gone to Spec Savers" ?
From a position of age and experience usually viewed mistakenly has patronising let me tell you a workable strategy for life really is 'Save me from experts'. The term expert may just be one of the 10 most mnisunderstood concepts to be found. In this case 'experts' at central banks are looking to be found out for what they really are.
That is , they have never failed to try to resolve every single boom bust cycle that they have actively helped to create.
enough of bashing. what would a Fed president Macro man do? :-)
ReplyCBs should finally come out and say openly that there's limit what a monetary policy can do, and that the government need to pick up the slack - and that CBs will do exactly nothing in the absence of fiscal policy, because there's exactly nothing to be done. CBs can create the money, but they can't spend the money. What the economies need now is not creating the money (there's more than enough), but incentives to spend.
ReplyOne could say that CBs can create inflation, which is an incentive to spend. Bollock. CBs CANNOT create inflation on their own. Repeat after me - CB's create money, they don't spend it. Inflation is created by spending money (only money spent can affect prices). It does not follow that creating more money means spending more money (if you distrust the theory, for empirical evidence, look at the last few years). Note that CBs CAN create deflation (and combat inflation) by removing money, but it's not the same as creating inflation by creating money.
I would have thought it reasonably obvious that the transmission ratio of creating money and that which is actually spent or invested as opposed to stored/saved depends upon how that money is distributed across the population. It's been my contention for too many years that the multi decade drop in the transmission ration is an accurate measure of how monetary policy has failed to trickle down and instead has simply led to wealth gaps widening. A consequence I would have thought is that consumtion becomes more and more credit dependent hence the rising debt levels. Pulling it together I think I would describe it has a policy destined to find a tipping point at which it simply does not work any longer WITHOUT some major capital destruction. The latter of course is what they keep trying to prevent eveytime we have a crash and burn thereby perpetuation the survival of the unfit which is usually where people start asking the question 'what's happened to productivity ?'.
ReplyAs mentioned above this is probably more a failure of fiscal policy than monetary policy which requires a certain distribution of monetary creation which has simply not happened.
Forgive the typos in favour of speed .
ReplyGrrrr…. Macro Man angry - Macro villagers agree with Macro chief - Macro villagers burn down Macro temple with Macro Yen torch and chase charlatan Macro priests away…
ReplyNOT - Macro villagers till fields and pray for rain while getting more washed up every day.
The last eight years have been about low rates, company buybacks, hedgefund housing incorporated, obamacare and a low dollar for the best part. All but one of those will keep you going and it has.
ReplyOne down , another one going up...and the rest will be like going to the circus and aiming up at the tin ducks. Just don't miss.
I wonder whether maybe the reasoning might be wrong. If the purpose of the Fed's existence would actually be what people say it is, sure they would have done the obvious a long time ago, wouldn't they? Or, taken from another angle, when being asked quite innocently whether you think one of the most powerful banks of the world would act in the interest of common poor people or the wealthiest of the wealthy, what would one say?
Replyhttp://www.bloomberg.com/news/articles/2016-06-15/yellen-seems-to-sign-on-to-summers-view-of-lingering-low-rates
Reply...To me this (yesterday) is where two roads diverged in a yellow wood, and we've taken the one that joins (if we hadn't joined it already) the rest of the world. That is the ZIRP/NIRP road.
It also seems TLT and AU are in the prime pole positions....
I'm getting out of here , Macro Man...gotta do the form for the Ascot cup and organize the after party after sneaking in the old boy!
ReplyQuick aside from Macro, here's a letter to the SEC explainng how exhanges & HFT screw all your orders for a risk-free profit (at your expense). Whilst this letter focuses on US equities, HFT is prevalent on all exchanges across all asset classes:
Replyhttps://www.sec.gov/comments/10-222/10222-474.htm
Do consider writing to your regulator, politician etc to have these scum removed from financial markets.
BiT, yes agree. ZIRP/NIRP, and when that fails, helicopter money and finally hyper-inflation. Debt problem resolved ! Thank you Central Bankers!
ReplySpeaking of Brexit...does it count if the Swiss decide they no longer wish to join? Swexit?
Replyhttps://www.rt.com/news/346884-switzerland-eu-membership-application-rejected/
@ Anon 1.06 And yet it's the FX market, which wasn't/isn't even traded on exchange, that's the subject of tens of billions of dollars' worth of fines. The mind boggles.
Reply@ BinT: That application had been on ice for 24 years. That's about as newsworthy as a headline that plans to make "Howard the Duck 2" have been definitively shelved.
"What do you do when you're in a position of heavy responsibility and you haven't a clue what to do?"
ReplyI thought this was going to be a blog post about Donald Trump.
Re Henner@8.16
ReplyNo, actually the bashing shouldn't stop. On the broader stage, outside the 'hallowed precincts' of blogs such as this, regular folks haven't even begun to comprehend how much damage this crop of central bankers has been doing, and continues to do, to their lives.
No, actually it isn't MM's job to come up with a solution. It's perfectly legitimate for him to highlight inadequacies and inanities in public policy without generating alternatives - particularly when the damage already done by policy now pretty much precludes what might have been far better courses of action, had they been taken at an appropriate time.
(Of course, as Anonymous@12.20 rightly implies, using the word 'public' to describe a Fed policy is a tad delusional.
Stepping aside from all forms of delusion, it's now almost time to watch Wales demolish England.)
Yen has crashed through the 105 level, next stop 100; EURUSD crashing lower too, next stop 1.1000 - and all that entails in the leveraged equity and commodity markets that were bid up with all those borrowed ¥ and $.
ReplyC'mon England... Woy!! Not picking Vardy or Sturridge is like saying, "we're England, we don't want to score...." (shakes head). Sterling, poor little misguided lad, has hardly played a good game since he left Anfield. [He'll probably get a hat trick now].
The Fed would be better off if they raised rates to 2% two years ago and said to the government, "OK you ***kers, it's your turn, fix the infrastructure and create some jobs we're not holding this thing up any more". It's a fiscal policy failure, not monetary.
ReplyI understand that risk aversion drives capital flows, but isnt this getting kinda nutty. Who really wants to buy Japanese and European fixed income at negative rates. -60bps on German 2 years! negative in Swiss 30 year. Surely this is a lot of CTA trend following there.
ReplyAs much lunacy JBTFD is in Spoo's. These fixed income markets are nuts. Just fast money trying to make a few ticks and play the trend.
I thought when your country is crap (Japan and Europe) you want to sell the currency. But today we buy it. If draghi has the tools (it will be enough) then after brexit he better start thinking about using them, kuroda san too.
DXJ Shares outstanding just on a free fall. So there is your capital flows for a stronger yen, though MoF JSIHSTCK not nearly as bad
@Left - of course - too late for the pivot to fiscal policy, but I sensed a bit of that in a recent speech by Draghi - there is a 12 month window in the US where given elections etc where the possibility of any fiscal maneuvers is basically impossible unless you get a 2008 style problem, which is highly unlikely - I do wonder increasingly about Europe but will still take the under on that too.
ReplyOne thing is for sure - if the next fiscal stimulus is not geared to the bottom 90% of the population, there will literally be riots in the streets - trickle down is just about over.
On a different note, does anyone know if there has there been any conversation regarding default by a corporation whose bonds ECB currently owns? I presume there would be a process in place to deal with the work out, but I can't find it anywhere.
Oh, Sterling! Even MM could have scored from there..... ;-)
Replyand left - forgot to mention - welcome to the 2nd half of the dollar rally that started in 2014 - u know, the one that has nothing to do with tech stocks or inflation expectations or policy divergences, but sort of happens on its own...
Replylast -1% day on S&P.. 4/7. hmm...
ReplyFun day for us already, as we were short EURUSD and CADUSD. With OpEx ahead, SPX 2050 may prove to be the floor for a modest bounce. Oil continues to go down every day, taking CAD and HYG with it.
ReplyAnyone manage to stay long JPY? Congratulations to anyone who had the vision to stick with it. Obvious in retrospect....
I suppose all eyes will be on Brexit polls over the weekend. Meanwhile the introduction of Vardy and Sturridge had the usual effect. Amazing how bringing on goal scorers leads to goals being scored.
The fed can and should do their own fiscal policy and send helicopter money checks out. The progressive nature of it will also help the true problem of income inequality or lack of income growth among those groups that have a high propensity to spend. The global economy continues to circle the drain until a CB does this. I feel it will be similar to going off gold in the 30s.
ReplyAm I the only one who thinks that the economy overall is much better than given credit for, and that the problem is not deflation or disinflation, but rather the perverse reaction by monetary authorities to a non-existent problem?
ReplyMalinvestment and debt are the real problems and they are all encouraged by central banks.
ReplyThe U.S. economy would be fine if so much capital wasn't still tied up in overpriced assets, especially piles of bricks that people live in, and the derivatives and paper associated with them, but of course now this extends to corporate bonds and equities. That capital could and should be put to work updating the 19th century transportation and communications infrastructure of the U.S. More bridges, airports and trains. Fewer "aspirational" mini-mansions, luxury apartment towers and office skyscrapers. End the REAL housing crisis (affordability) by raising rates. Let home prices fall and once more find their natural level. It's time to take advantage of the demographic shift to encourage the Boomers to downsize, sell off their excessively large homes and change places with Gen Y and the millennials in their cozy one bedroom apartments. End the selfishness and excess of the most selfish generation ever and give another set of families a chance to grow in what is still one of the greatest places to live. For once, Boomers, just do the right thing. Dame Janet can lead America into a new era....
Of course they will never do it. We will have to pry the keys from their cold dead hands.... Bernanke said "we will hold these bonds to maturity" and he meant it.
Having a bad day, Lefty? Ranting isn't usually your style...
Reply...Raising rates would of course, be of long-term benefit to all...but only a select few boomers have control over that....
Angsty posts today! I feel you LB @5:45.
ReplyI presume no hikes this year. If previously the Fed was signaling an intention to hike whenever markets and data gave them the chance, yesterday they seemed confused and biased to do nothing. In the previous meeting's minutes they mentioned "June" six times, and after one disappointing NFP # they totally capitulate. I've never taken the median dot seriously, but looked to the lowest four or five as an indication of where consensus was, and I interpreted yesterday's move in those dots as a capitulation. One expected hike instead of two means they'll likely need months of positive data to be ready to hike again, and any number of new negatives could come into view in that time that would push the hike further out.
I'm sidelined now. Brexit is right in front of us and it's really too close to call. For those who don't think China is going to blow up in the next months (that includes me), I do favor some merger arb bets with Chinese strategic acquirers (implied odds range from 40s-70%). Gold back at pre-Fed announcement levels just as I write perhaps worth a punt.
LB re your ... " time to take advantage of the demographic shift to encourage the Boomers to downsize, sell off their excessively large homes and change places with Gen Y and the millennials in their cozy one bedroom apartments. End the selfishness and excess of the most selfish generation ever and give another set of families a chance to grow in what is still one of the greatest places to live. For once, Boomers, just do the right thing"
ReplyI can only assume that you had your tongue firmly in your cheek throughout that as I cannot imagine that you have just completed your own wealth equalisation with the next generation down and reverted back to the level of savings, income and accommodation you possessed when you were 22. Have you?
I am absolutely horrified by the murder of UK MP Jo Cox, but do struggle with the idea that Brexit is cancelled because of her awful murder as everyone will vote in sympathy with her beliefs rather than the ones they held 10 mins before she died.
ReplyIs this the Archduke Ferdinand moment in reverse where a lone nutter with a flimsy cause carries out an awful murder on a political figure but in this case ends up preventing the disintegration of Europe rather than causing it?
@Pol
ReplyWho knows but ~10% undecided? I'd like to think it won't affect the result either way. But it's terrible, and public emotion likely more sensitive for a while; interpretations more malleable even.
Disclaimer: long ago immigrant with euro parents and already voted to leave.
Pol - a few of us on the floor were immediately thinking this once it broke who the victim was and the attacker was white. It will likely sway the undecided depending how it's played out in the various types of media. Looks like some big players shifted pretty quickly.
ReplyLast anon.. the markets reacted but things like IG bookies Price on IN was up ahead of it and only a smidge up after. Nothing compared to the market reaction.
ReplyLooks more like tues/ yesterday was a sharp adjustment to brexit risk and all markets were using it as an excuse for sell off. One of those 'yup the story fits so lets run with it' back fitters as much as real new stuff. I was watching GBP vol start to drift off much earlier in the day despite bookies odds still tightening and watching other stuff stabilises so this to me looks like a market bounce from market over stretch downwards.
But really .. should eh terrible murder of a UK MP be responsible for the SPX going up 30 points?
@ Pol. Is it really that difficult to see how the senseless murder of a notable remain supporter, possibly by a national front-type character, might provoke a reaction amongst those sitting on the fence?
ReplyIf the campaign were being fought on hard facts and data, perhaps not....but it isn't, so it is reasonable to expect an emotional campaign to be impacted by an emotional event.
You hit the nail on the head with this highlighting the emotional bias to the vote as the facts are so obfuscated. In that respect no, it isn't hard to see it at all. But this is a case of imagining how others will react rather than actually seeing it, does anyone here know anyone who has changed intention on this?
ReplyWe are imagining how others rather than ourselves would react in a way discriminating against others' thought processes. Is it arrogant to assume that we should consider our own thought processes superior and and different to the masses or perhaps we should just extrapolate how we ourselves think and use that as the best proxy for the average of everyone else.
But hey, if it is to be that the logic of EU entry or exit forever is overridden by the emotions around the loss of one life then so be it. As we started on this, t'was the way with Archduke Ferdinand.
the world is just soooooo X Factor
Reply@Polemic
"...a case of imagining how others will react rather than actually seeing it...". While logically appealing, the focus on real people telling you what they will do does not work in practice. People's views of how others will vote are a more relevant predictor than what they say about themselves.
http://eprints.lse.ac.uk/60295/1/__lse.ac.uk_storage_LIBRARY_SECOND~1_libfile_shared_REPOSI~1_Content_LSEUSA~1_LSEUSA~2_blogs.lse.ac.uk-Asking_voters_who_they_think_will_win_is_one_of_the_most_accurate_methods_for_forecasting_elections_a.pdf
Interesting Michael .. thank you.
ReplySo perhaps the opinion polls should stop asking people how they will vote but ask them how they think everyone else will vote. In fact why haven't they done this already?
Well, it seems to me the 30 points down in spoo's were pretty emotional too. Everything is emotional these days. Rationality was abandoned long ago or clearly we wouldn't have negative rates. Central banks would not be speculating in the equity markets. The Fed would already be at 2% allowing banks to lend at profitable rates to small and medium sized businesses who have been starved for credit, so they could expand and hire people. Instead we have nit wits trading negative rate bonds on the greater fool theory enabled by Central Banks so enamored of their complicated models that they don't seem to understand a few simple things about how economies actually work. Or, as someone pointed out above, they only serve their masters, who are not most of the people in the economy. Thanks, I feel better.
ReplySee page 13 - http://www.opinion.co.uk/perch/resources/orbindependent-friday-10th-june-final-data-tables.pdf
ReplyOr see Economist's summary - http://www.economist.com/blogs/bagehot/2016/06/brexit-polling.
The media prefers to cover less useful but wildly swinging data where possible. The most profitable product is not always the most socially valuable one. Someone should create a bank or investment fund that follows those axioms. It would make squillions.
Don't blame it on CBers, like politicians they are just lackeys of the 1%ers who want the world to revert to ancien regime kind of inequality and are succeeding.
Reply