A Bigger Anchor

Chief Brody famously opined, "I think we need a bigger boat." The Federal Reserve is moving toward a "bigger anchor." Since the Duration Death Stars blew up in May and June (h/t @groditi ), the Board has dialed up, reinforced and white papered the forward guidance rates promise, well rule, well more like a guideline...Parlay !

In transcripts and research papers, the Fed discusses the projections and extrapolations embedded in Fed Fund Futures (binary and boring) Eurodollar Strips (wild, dynamic and color coded) The Fed has quickly upped rhetoric and unleashed the Hilsenrath when these prices have attempted to awaken from the Central Bank induced coma they've been in for the past 5 years. "Forward guidance" is Mother Central Bank's term for telling you what they're doing and not trusting you to understand it.

Put simply, Forward Guidance neutralizes one of the best feedback loops that market participants can send policymakers. By anchoring rates well into the future, the Fed promulgates periods of false low volatility- stability, in CB parlance,  punctuated by bursts of chaos resurrecting fears of lost "control." Monetary Policy cannot be implemented under a dark cloud of mistrust of the participants opinions of it, reflected in forward prices. As LSAP is dialed down (even just the discussion of the possibility), "anchoring" is being reinforced. We think this is a mistake.

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