The first Friday of the month arrived with the usual combo-platter of noisy data, thin economic assumptions and perma-pessimistic detractors. We believe a fundamental observation is being overlooked.
The Federal Reserve's central policy calibration remains QUANTITATIVE. The news feed is a steady stream of "Fed hikes here" scenarios and "This is good because stocks go up when the Fed hikes" mumbo jumbo. (The latter being a Michael Jordan can fly "truth"...i.e. For a little while)
To begin, NO Central Bank has EVER exited a Quantitative Regime. The Fed is advertising something called "Lift Off" but that is a euphemism for "We are going to change the funding rate of the Regime Operation." Long time readers will note that we believe this is a mistake but the key point here is, because of re-investment and balance sheet size; the quantitative central tendency remains in place. "Rate-Normalization" predisposes an abnormal state now, an assumption even bond bears like us have questioned.
The rapidly developing disconnect is the application of Rates Regime targeting to the well advertised pending change. Policy makers and market participants are taking an optimistic view of transitioning the Hillary Step of monetary policy. (#GIK- the Hillary Step - make it or die) Given the disastrous results of the Greenspan rate targeting, open incremental adjustment cycle, (when Fed Bal Sheet size was puny) a more robust debate about Fed orientation and intention should be taking place. The Death Star and development of the Overnight Funding Rate may turn out to be new tools for the wrong job. Electronically marking up the balances of accounts at a faster pace with Trillions in stock means we're not out of Wonderland, yet.