Outside the Fed Tool Box

There are six - count them 6- Fed speakers today. Somehow the focus is on the Chairman's new schedule of periodic appearances after meetings starting on April 27. "Jawboning", "Steering" and "Talkin' about it" are the new wrenches in the Fed tool box. All of this, and virtually everything else, is done for STABILITY. There are 36,000 Google News stories hitting on "stability" and her twin sister "transparency" is trending right behind.

Let's reverse engineer the concept. The transparency objective has been rolling along at least since LTCM. Has the move toward openness ( in the market, or at the Fed ) resulted in less scandal? Fewer crises? A more productive Fed? The Volcker regime was extremely closed and abrupt with its market associations and policy was very effective. In fact, the St. Louis Fed did an extensive study PRIOR to the Greenspan quarter point telegraphed hiking disaster that showed surprising the market expectation was the most effective signaling method. The Fed is slogging through the regulatory landscape in hopes of energizing a weak weapon.

Stability, disambiguation, represents permanence of condition. Markets exist to deal with the paucity of the former. Resiliency  and robustness are far better objectives for policy than openness and stability. The 2008 crisis showed that big markets are not necessarily liquid or flexible. Volume, for the day or for a nano-second on the offer, is a poor metric of robustness.

Our key take away from the Fed Presser announcement is that another swap is being negotiated. The Fed is glacially moving to a phase of doing less and jawboning more. We think the concept has merit because right now they are doing too much. After LSAP ends policy will not be far from neutral based on our model. We expect a lot of chatter to fill the void. In a world oriented toward "buying things", we are contrary because we look to sell. (Chauncy Gardinier likes to watch, we like to sell. It's our nature) I have a feeling the Fed is going on a publicity tour aimed at keeping people like us at bay.




Leave a Reply

Your email address will not be published. Required fields are marked *