Here's how Mark Dow and I discuss our differing views on Fed policy from a shared POV.

Here's the base question: Does the Fed look to raise rates because labor is tighter and the data is better OR for financial stability insurance?

Both Mark and I come down on the latter as the primary focus. Stan Fischer alluded to the Fed's take in a subtle dig: "We don't see evidence of it but we keep getting told it's there, so we watch for it." In other words, end users are more concerned about system stability than fed officials. GUILTY !

From a policy execution standpoint, Mark would argue that adjusting the funding corridor will "pass along" borrowing cost enough to blow the froth off spec asset appreciation while balance sheet "stealth twisting" will continue to support long end rates and the economy. Hard to find a flaw.

My view is focused on walking back the balance sheet thus ensuring that rate hikes - when used - are effective and signal an exit from QE and a return to rates targeting. (2 Sidebars- First, the Fed is opting for the former path and has stated so. Second, my disdain for rates targeting is well documented and a big reason I was a QE advocate early on) Fischer leaked an important idea in his chat with Steve Liesman: He pointed out that other CBs - the BOE in his comment - have higher funding pegs and remain in QE regimes AND highly accommodating.

This is the disingenuous core of the Fed's vocal ploy. Coupled with heavy assurance of "Just one, then a long pause," the Fed sees the rate corridor hike as optical even if practitioners, like Mark and me, see it as systemic. Rate Normalization is a euphemism for "this won't hurt a bit." Moving on rates prior to the balance sheet wreaks of "we aren't really snugging so keep on keepin' on."

A central bank only has 3 settings, easy-neutral-tight. Our stance has been the Fed is not/has not been as easy as most believe. Recent aggressive re-pricing enforces our view. That spec prices can find themselves so dislodged from the underlying truth is the seed bed of the above discussion. Is a central bank designed to harness human action? This is not about bubble popping. Are the blunt tools of monetary policy effective for the nuanced and inside baseball issues we are discussing? My answer is an obvious no.

I liken the long bond to Chauncey Gardener as depicted by Peter sellers in the movie version of Jerzy Kosinski's Being There. Director Hal Ashby added the closing scene where Chance appears to walk on water. The reason was to highlight a question, does he not fall because he is god, or because he doesn't understand gravity? Are long bonds here because they are supposed to be or because the Fed is propping them up. The only way to know is for the Fed to get out of the way.

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