“Warning Signs” & The Fed’s Grand Illusion
Via Scotiabank’s Guy Haselmann
ZeroHedge.com
10/23/2014
Ever since Bullard’s agoraphobic performance last week on Bloomberg TV, it should be crystal clear to the FOMC and investors just how powerfully markets will react to any shifts in Fed policy or attempts at policy normalization. An equity market freefall abruptly took an about-face, resuming its ‘melt-up’ trade, after a worried Bullard merely hinted at the possibility of more QE stimulants.
The FOMC should take this as a warning sign. It would be irrational for the Fed to believe that after QE purposefully elevated asset prices and generated a one-way moral hazard spectacle, that there is not going to be some-type of reversal (reaction) when QE is withdrawn and the first hike nears.
The new flaw in Fed communication that has arisen recently, and that was amplified by Bullard’s interview, is how Fed policymakers fundamentally assess and mollify the trade-off between attempts at stimulating real economic activity and financial stability risks.
For several years, the FOMC has been confronted with the delicate balance between removing accommodation too slowly and removing it too quickly. Since the Fed is basically out of effective bullets and its balance sheet has ballooned to the practical limits of prudence, the Fed is therefore trying to err on the side of not removing accommodation too quickly. In this regard, the Fed has allowed the fog to roll in, by repeatedly and cunningly changing the markets’ focus in order to ‘buy time’. (As a case in point, the first hike never arrived when the unemployment rate hit 6.5% as the Fed initially said it would.)
Yet, how far can this asymmetrical leaning go before negative second-order effects and risks to financial stability via asset bubbles make this stance a (ever-growing) poor trade-off. It seems to me that if the Fed were truly data dependent then it would have ended QE a long time ago and even hiked rates already.
The Rest…HERE
