Category Archives: Blog

Monetary Policy Forum

The Chicago Booth School held its annual Monetary Policy Forum ( Hey they use my book there !) today featured a panel on the Equilibrium Fed Funds Rate. Long time readers know this is a topic near and dear to me, as I have been a vocal anti-Taylor Rule instigator and have had my own "model" since the early 1990's.

Steven Beckner summarized the panel views in a long BBG piece earlier today. The key take away being:  "If the "equilibrium" interest rate has fallen somewhat,the Federal Reserve might need to delay raising interest rates, but if it does the Fed will likely need to raise rates "more steeply" later."

The panel disputed the Larry Summers' promulgated view of a secular decline in growth rates. Here's my view from the Left Coast:

Skipping past the math that led to my neutral rate calculation, a simple way to consider my view goes like this - If you start to build from the FF rate you don't get "clean" feedback because the first input may not be in the "appropriate" place. ( The Taylor Rule is built on inputs that are subject to huge revision and time delay making it useless from a policy steering standpoint.) Thus, I use a rate that is influenced both by the Fed's present rate stance AND market participant pricing -  12 month LIBOR. [ IMPORTANT: These metrics assume a return to a Rate Regime - a primary orientation NOT yet achieved by the Fed.]

So, looking at just the recent past, we see:

This date last year; .56

Last month: .62

Today ; .67 ---

Subtract the constant of 60 bp and voila, you have the Equilibrium Funds Rate or, roughly the prevailing rate 7-12. (smart guys like @groditi can build you all sorts of cool graphs if you ask nicely) Point of parliamentary procedure - By equilibrium we mean the rate at which the Fed stance is neither stimulating nor inhibiting growth. The "neutral" rate, a monetary policy maker's nirvana. In our brief snapshot we can determine that the Fed was "assisting" the negative neutral rate with LSAP. As the rate adjusted up, (no change to official FF rate) policymakers tapered the buying. As we've stated numerous times prior, contrary to popular delusion, the Fed was not/ nor could be as aggressively stimulative as many concluded simply because the official rate was "ZIRP." In a post credit super cycle burst, the equilibrium rate fell to zero/negative. Despite heated ranting from famous detractors, if the market was left to determine the rate it would have eventually found the zero bound, according to our work.

Suspending your disbelief for a second, I would pose this question: Given the prevailing "Neutral Stance" and the observable data inputs (inputs that as a cluster support the equilibrium view btw- moderate growth/ low inflation) Why should the Fed need/want to raise the rate? In fact, despite all the jawboning, if the Fed were to act under the present term structure, we would deem the action PREEMPTIVE. With debt deflation still a real concern for much of the developed world, preemptive rate hikes seem dangerous to us. The long lead time to action is a function of the market's inability to adjust away from ZLB as much as policy makers FG promises- which have faded without violent market rate upward adjustments.

Conclusion: The Fed has time to wait on raising the rate because Mr Market says so. When/if the market rate is able to stretch from the ZLB, the then "behind" Fed stance will become temporarily MORE stimulative, advancing late cycle positive consequences suggested by @ivantheK in yesterday's stream. (Example: 12 month rate rises to 100bp on improving outlook and Fed official rate moves to 25 -50 window. Market prices middle at .37 -still pretty neutral (100 - 60 = 40) ! If 12 month money continues to rise, a big if given the world, the pace and strength of Fed adjustments should adjust accordingly behind it.

 

 

Classical Friday

30 minute atr
240 minute atr
daily pivots
weekly pivots
upside retracements
downside retracements
regression channels
support and resistance
roll gap
On the economic calendar:-
08:30 GDP (Consensus 2.1% v Prior 2.6%)
09:45 Chicago PMI (Consensus 58.7 v Prior 59.4)
10:00 Consumer Sentiment (Consensus 94.0 v Prior 93.6)
          Pending Home Sales (Consensus 2.0% v Prior -3.7%)
15:00 Farm Prices
Speaking today:-
William Dudley, Loretta Masters and Stanley Fischer participate in the US Monetary Policy Forum 2015 Annual Conference in Chicago

Selling the Storyline

"In general we look for a new law by the following process. First, you guess. Don't laugh, this is the most important step. Then you compute the consequences. Compare the consequences to experience. If it disagrees with experience, the guess is wrong. In that simple statement is the key to science (and for me, trading) It doesn't matter how beautiful your guess is or how smart you are or what your name is. If it disagrees with experience, it's WRONG. That's all there is."

Richard Feynman

Classical Thursday

30 minute atr

240 minute atr

daily pivots

weekly pivots

upside retracements

downside retracements

regression channels

support and resistance
On the economic calendar:-
08:30 Consumer Price Index (Consensus -0.6% v Prior -0.4%)
          Durable Goods Orders (Consensus 2.0% v Prior -3.4%)
          Jobless Claims (Consensus 290 K v Prior 283 K)
09:00 FHFA House Price Index (Consensus 0.5% v Prior 0.8%)
09:45 Bloomberg Consumer Confidence Index
10:30 EIA Natural Gas Report
11:00 Kansas City Fed Manufacturing Index (Consensus 3 v Prior 3)
          3 Month Bill Announcement
          6 Month Bill Announcement
          52 Week Bill Announcement
13:00 7 Year Note Auction
16:30 Fed Balance Sheet
          Money Supply
Speaking today:-
12:40 Dennis Lockhart

Classical Wednesday

30 minute atr
240 minute atr
daily pivots
weekly pivots
upside retracements
downside retracements
regression channels
support and resistance

 On the economic calendar:-

07:00 MBA Purchase Applications
10:00 New Home Sales (Consensus 471 K v Prior 481 K)
10:30 EIA Petroleum Status Report
11:30 2 Year FRN Note Auction
13:00 5 Year Note Auction

Speaking today:-

10:00 Janet Yellen

Mute the Fed

The hue and cry from the "protectors" of citizen's rights to "Audit the Fed" is trending faster than NPH in tighty-whitey's. Here's a better idea - Mute the Fed and reboot the concepts of consequence and loss to the capital structure.

I received an email from an old friend and mentor the other day that was a stream of consciousness series of questions. Most, I and he, had long ago formulated the answers to. One, stood out in the "choir-preaching" however: When did the divorce between faulty thinking/poor decision making and negative consequences take place? The answer, in my mind, is shortly after the Fed decided to tell you what they were doing.

The Fed Chair is now just the Mayor of Lake Wobegon, were everyone wins and all the market participants are above average.  The near month long retreat in bond prices is only the latest example. After spending the first month of the year listening to a Whitman's Sampler of convoluted and hack reasons for owning long dated securities, the 3 week (and longest since Taper Tantrum) slip has - we are to believe - harmed no one. I have one word to interject : CHALLENGE.

Maybe, just maybe, what Ms Yellen was trying to say today - in between the moronic "Audit" theme - was someday soon market participants will need to think for themselves again. That the concept of price discovery will provide policy makers with needed feedback on the state of the world. That you, young Titan of the Universe, will be introduced for the first time in your vaulted career to a little ditty called LOSS.