We discussed a few days back the idea of FG at the Fed, now CB policy du jour, in A Bigger Anchor. Today, in what may become the Eric "Otter" Stratton Fed moment - You f*cked up, you trusted us - James Bullard took transparency to a whole new level.
Clearly disturbed by the duration convexity bloodbath and real rate shift of early Summer, Bullard admitted that the Fed could not control the tidal flow and primal urges of the Bond Crowd. Recognizing that, and the CBs marginal forecasting track record, Bullard basically said they were gonna give FG a shot anyway. Fed policy now is calibrated to an arbitrary level of LSAP and data dependent FG . The former doesn't do much but create excess reserves. The latter is about as strong as Kevin Bacon yelling "Remain calm !" as everyone flees the Deathmobile. The prospect of regular press conferences was floated to amp up volatility every 6 weeks.
Our thoughts are simple : Its the transparency, stupid. The feedback the market can give the Fed is far more valuable than their rhetorical and Hilsenrathed attempts at "guiding" it. The Fed's own team saw the Summer swoon as term premium driven. After the duration dump and negative convexity hedge blow out, why didn't the Fed just see if the FF hikes would be taken out of forward prices when things settled? Obviously, they don't trust the TLT-ers like they did the Eurodollar traders of yore. "Taper", now by their own admission, is a farce masquerading as a ruse. Policy can be easy, neutral or tight and markets have a big say in the effectiveness of those calibrations.
Here's my suggestion for Bullard et.al. : We'll tell you what to do and when. Can I get 10,000 marbles please?