Rut Roh

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 : We'll tell you what to do and when. Can I get 10,000 marbles please?



One thought on “Rut Roh

  1. IvanTheK

    Great post, as usual.

    I would only add that the Chairman himself gave us a candid confirmation of the notion that the market can indeed deliver messages to the FOMC. At the June 19 presser, Bernanke was asked to reconcile the recent real rate rise with the size and/or forward path of the Fed’s stock of assets. To which he responded:

    “Well, we were a little puzzled by that. It was bigger than can be explained I think by changes in the ultimate stock of asset purchases within reasonable ranges. So I think we have to conclude that there are other factors at work as well, including, again, some optimism about the economy, maybe some uncertainty arising. So, I’m agreeing with you that it seems larger than can be explained by a changing view of monetary policy.”

    I assume the Chairman has since added the duration convexity mess referred to in Kevin’s post to his explanatory variables.

    In any event, the good news is that Double Secret Probation seems to have been lifted.


Leave a Reply

Your email address will not be published.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