Fed Tries Wishing

We have not been populist haters when it comes to Fed criticism. In fact, we were an early advocate of the IOER regime and several facility (ya, they're QE too) developments. As we noted 2 weeks ago, the growing chartalist movement has moved the Fed toward outcome targeting. Jon Hilsenrath, Greenspan's bath tub confidante, is floating the latest Fed balloon over the market this morning.

Hilsenrath (WSJ) reports that further LSAP is "data dependent" - Fedspreak for "we don't know." However, he also indicates that the OMC will move toward "showing" a goal of 2% long run inflation and "achievable" unemployment under that long run goal, target, objective, concept or threshold for inflation. Something between 5.5 and 6.5% based on past generalities seems reasonable. This is novel thinking like Lady Gaga is to Madonna. I guess critics could call it "reductive."

We call this type of policy public wishing. The idea could be useful IF it were coupled with surprise moves aimed at achieving it. The "open" objective has reduced efficacy in monetary policy and attenuated outcomes. The key benefit to US accommodation we see is the plethora of other global CBs now tilted toward ease. if we are correct Fed targets will be "vacinity-ed" simply by staying the course. Now the $64k question: Will term structures obediently adhere to the gravitational pull of the zirp or begin to risk weight the possibility of getting it right. If the answer is the latter, a seismic shift in allocation and position lies ahead.

3 thoughts on “Fed Tries Wishing

  1. Mike Banas

    If Aretha Franklin were trading for her own account and had she published “R-E-S-P-E-C-T” today, she might have restyled the song as “L-T-R-O & Q-E-3, take care, TCB” And the big question seems to be, for next week, will the OMC “sock it to me, sock it to me, sock to me” or not, will it be big or “just a little bit, just a little bit” AND what will the market reaction be? To Mr Ferry’s point about a potential seismic shift, at least one trader made a huge vega bet via a VIX straddle, noted here by Jamie Tyril: http://www.optionmonster.com/drj_blog/article.php?page=drj_blog/big_vix_vega_trade_on_sonar_report_65254.html, looking for a big move in the $VIX (S&P), either way, based perhaps on LTRO&QE3, the Euro-crisis, or any of an array of market catalysts and concerns. Such a trade is one way some deep pockets expressed a hypothesis or hedged a position. Take Care, TCB!


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