Monthly Archives: July 2018

A Jaguar in New Orleans

Yesterday solidified my view from our last post - Turn My Life Down  - that it is well past time to change the channel on The Trump Show. This post returns my musings with Hooper to its prior form and the topic of rates.

In the past few weeks, the nerd squad previously known as "Fed Watchers" has dumbed down monetary policy discussions to the grilling techniques of a publicity seeking bench player and kow -towing Hannity-esque spin.

Here, and in a smattering of reality based market forums (i.e. NOT Futures Now), the concept of the L.R. Neutral Rate in the 4 to 5% was soundly rebuked. We not only made a historical but also a mathematical case that the LRNR was closer to 2% with the possibility of rising marginally if certain fiscal policies were thrown in as variables.

As this projection has steadily morphed into reality, the stability (zee stabeelity for our EU readers) and consolidation in capital markets has twisted tighter and tighter in over-hyped ranginess but actual somnambulant drift. The FOMC has, correctly in our view, slowly nudged the FF rate to just under our forecasted neutral rate (where policy is neither accommodative or stringent) of 2.10%. The current effective rate is 1.91 and the Fed has elected to fine tune in by 5bps the 1.95 IOER.

This, and the intensity of their balance sheet reduction, remain the ONLY things they can attempt to control. The latter has been isolated to a natural roll down too big and clumsy to play with. Thus, a small set of short rates; not the belly, the 10 year note, the bond or the Ultra, are the steering mechanism of The Fed. Their success has been to reject the popular notion of the 4-5% window as the 70's/80s anomaly and 90's mean reversion that it is.

But every consolidation eventually slops sideways to the point of disruption. (Mark Dow has been tracking similar situations in FX you should be watching) And then, markets get loose. Like a Jaguar in New Orleans, innocents will get mauled. Soon.