Nudged

Policy makers are turning to Nobel winning theories in behavioral macro in the wake of the Florida school shootings. Perhaps the Powell Fed will embrace similar thinking as decision making becomes more difficult in 2018.

The Fly in the Toilet

One way the FOMC could "increase its aim" is to allow policy to be nudged in the market determined direction. This simple compass calibration would actually be a radical departure from the last 30 years of leash pulling. Using our cocktail party rule for neutral, the current FF rate would be around 1.75 if Mr. market could set it. Toss a late cycle, full employment tax cut and a potentially pro-cyclical budget agreement and "neutral" tilts a tad north of that rate.

The Unseeded Hurricane

Two high decibel attacks on innovative monetary policy during the crisis ("defining down monetary pornography" I believe was the way one delusional CNBC contributor - I heard he was awesome - termed it) were : 1) It would be "better" to let everything fail

2) Deficits are bad

The former was a counter factual value judgement and the latter was a straw man handcuff that forced monetary policy to perform even heavier lifting. In behavioral terms, if you seed a hurricane you accept the liability of the landfall. Extraordinary monetary policy, euphamized as QE, now must accept the consequence of a successful landfall. Too many have locked into the balance sheet rolloff camp under slow rate rise Zoloft, in our opinion. Dumping securities and holding the anchor rate slightly lower than neutral (maybe just a nudge higher) should be an option, at least. Continuing to fiddle with the funding rate will increase impacts in the already messy fulcrum of the curve. (Year money at 2.39 today and 5 yr at  2.66+ and the 2 at 2.23 (auction day))

Was he a good dog? Who's to say, but he didn't deserve to die

Should the normal arc of Federal Reserve tightening, snugging, nudging cycles prevail; The Fed will own the expansion's demise. For many perma-bears and apopleptic TV bond reporters, this would verify their long held inaccuracies about the cycle and the bold innovations that nurtured it.

 

 

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