EC Some Thoughts On What Is Happening

Coming out of the Great Financial Crisis, the Fed was on a path toward normalization of monetary policy. The sequence called for an end to the asset purchases. Then after a "considerable period" rates would gradually increase. After some time, the balance sheet would be reduced by ceasing to reinvest all of the proceeds of the maturing Treasury and Agency bonds. The strategy was set before Trump was elected and has continued, unabated. There has been great continuity from Bernanke to Yellen to Powell. By maintaining this course, the Fed did not monetize the Administration's fiscal or trade policy. To the contrary, the above trend growth may have boosted the Fed's confidence to lift rates as it has done.  

The flattening of the yield curve is widely cited as a warning of an impending recession. However, there are two sets of mitigating factors. First, how can there be a discussion of the yield of the benchmark US 10-year yield without some discussion of the negative interest rates in Europe and Japan? Second is the role of US debt managers who are choosing to concentrate the issuance at the short-end of the curve.  

If President Trump's criticism of the central bank happened in nearly any other country, investors would exact a steep price.  Yields would rise. Currency would sell off. This is what happened in several emerging market countries this year. In the US bonds have rallied, and the dollar remains firm. 

What has changed over the past couple of days? The January 2000 Fed funds futures contract implies a yield of 2.39%. The current effective average is 2.40%. Further afield, the market is pricing in a rate cut in 2020.  Signals from Washington have changed. The President is no longer, we are told, thinks he has the power to fire Powell. Treasury Secretary Mnuchin's publicized talks with banks (about liquidity) and regulators (about market functioning) may have not been handled well and but reports of his possible dismissal has also been played down. On trade, the US will reportedly send a delegation, apparently coming mostly from Treasury to China in January.  

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Read more by Marc on his site Marc to Market.

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Barry Hochhauser 2 years ago Member's comment

Good article and comments.

Carol W 2 years ago Contributor's comment

First they should STOP the press conferences..JP screwed up when he went off script..his autopilot remark was a real special kind of stupid. Plus the press does nothing but misinterpret adding kerosene to the fire. Less info is more when it comes to the Fed. Transparency has been way oversold.

Marc Chandler 2 years ago Author's comment

I do not think #Powell broke fresh ground indicating that the balance sheet reduction was on autopilot. The #Fed has intimated it before. It indicated that the balance sheet is not long a policy signal and that its reduction was technical in nature and would continue unless, the Fed approached the zero- bound again.

I also disagree about transparency being oversold. Given the immense power of the Fed and its relative insulation, transparency it seems to me, is integral to its accountability What is it doing and why? I get strategic ambiguity and can accept temporal inconsistencies, but I for one am happy that the purposeful obfuscation of the #Greenspan era is over--that "Secrets of the Temple" is a period piece. The system evolves.

Carol W 2 years ago Contributor's comment

Sir, you misinterpret me. #Powell can't be data dependent and on autopilot simultaneously. I'm all for the Fed blathering to the masses about what it's up to. Delivery your little speech and get the hell of the podium. The post press conferences are stupid.

I never referred to that Ayn Randster groupie's marble mouthed delivery but now that you brought him up, it was an insult to the public and he exposed himself as the fool he was. Worst Fed chief of all and that's saying a LOT.

Gary Anderson 2 years ago Contributor's comment

Greenspan created the New Normal with financialization, hoarding and derivatives, Carol. That is either a stroke of genius or absolutely diabolical. I don't like it, but in an advanced society, protecting collateral seems to be important, especially when that collateral is debt.

Carol W 2 years ago Contributor's comment

regarding your Greenspan comment I posit the latter. cheers

Gary Anderson 2 years ago Contributor's comment

So, basically, Powell said economic growth slowed but is on track to increase. What does Wall Street know that Powell doesn't know?

Moon Kil Woong 2 years ago Contributor's comment

This decline is heavily driven on politics, more on political destabilization caused by Trump than anything else. Because of this, as he addresses the uncertainty the market is bouncing back up rapidly. If the China trade war end and the uncertainty over the Fed ends the market may be set to rally strongly. However, this remains a big if, just like the potential for a deal to reopen government offices.

The other big reason for the market decline is the fall in oil which adversely affects many companies in the US and many economies. Trumps insistence that he wanted lower oil prices as low as $1 and pushed for Saudi Arabia to make it so may be a bad wish because if it came true it would collapse large portions of the US economy. We are dependent on oil these days as much as we ever were. It's just that we are now a large producer as well rather than a giant consumer.