Now what ?

In November of 2008 Quantitative Easing became a household word and the LSAP (Large Scale asset Purchase ) program was launched. Quickly, the 2 concepts became viewed as one. Like Ebeneezer's nighttime guests, QE 2 and QE 3 were visited upon us in Nov. 2010 and Sep. 2012. Unlike Scrooge, the nation has not risen with a renewed outlook and joyful re-incarnation. The landscape has changed markedly, however.

The simple truth is markets care about the calibration of monetary policy not the ugly way in which its delivered. Now that LSAP has faded away, we will get another chance to see how far, if any, the spigot has been left open. Taylor, and many others, has argued that the FF rate should be considerably higher. Here's a thought experiment: When oil prices move, a multitude of global adjustments take place. Yet, when the most fundamental borrowing rate in the financial system is "artificially held too low" for years....nothing happens and more importantly, Mr. Market makes no attempt to alter it. Oil traders are brilliant but bankers are all dumb.  We do not,,,and have never believed it.

The purest example of our belief is what transpired earlier this month. After months of FG prodding that the Ghosts had all visited us, participants herded into the promoted idea of "raising the rate." 10 sessions ago, just before the POMO swansong, that idea blew up magnificently. QE continues to have the dubious reputation of being completely ineffective AND the cause of everything. We have tried over the past years to draw the distinction between LSAP (and other innovative programs) and the policy regime..QE. We remain in a QE regime so prepare for reports on halting of re-investment and the roll down of the Fed balance sheet. Raising rates is reactionary Fed policy not precautionary. Goodbye POMO, hello ???

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