We’d love to see Maria Bartiromo throw her hands up and gasp, “Oh Jan Hatzius from Goldman Sachs…” when confronted with a fact but we won’t hold our breath. In the -there’s 7 hours trading I’ll never get back Dept.- the whole day revolved around a 2 month trial ballooned nugget of lowering the UR “threshold” (more like a guideline) for raising the Funds rate. Well bowl me over with a feather.
But- and this is a Kim Kardashian sized but… from the LA Times to CNBC the fully telegraphed approach is still misinterpreted ! After generically substituting LSAP for QE – despite our multiple rants to differentiate right here – news organizations remain oblivious to the fundamental REGIME ORIENTATION of the Fed. A quick refresher for the special needs audience:
1) Volcker conducted a Quantitative Regime in his inflation fight calibrated to Money Supply and Credit.
2) Greenspan (pre-dated by Fed Staff) switched to an Interest rate target regime. Moving further into Operational Control under the Ferguson advisory of transparency, Greenspan signaled when and by how much the rates target would change. ( 25 bps every 6 weeks at 2:15 et..is that simple enough? )
3) That incredibly stupid methodology fertilized the “Fed Watcher ” industry, institutionalized the meeting counting Mensa candidates in Fed Funds Futures and -skip to the good part- blew up the global financial system.
4) The Bernanke Fed took the FF rate to “zero” (officially it 0-25bp) and AGAIN returned the CB to a QUANTITATIVE REGIME. The regime has used a variety of tools from innovative repo facilities. IOER and Large Scale Asset Purchases (LSAP) of Treasury and MBS securities. The latest policy It Girl is called Forward Guidance.
5) Tapering – the idea that unleashed the Duration Devil on the term structure – was meant to sooth the transition back to the hoped for Rates Regime. Peeps freaked out. What Hatzius and others at the Fed (pun intended) are trying to do is create an OFFSET to the reducing/halting of the LSAP program. The offset is a lower UR threshold for REGIME CHANGE.
6) Contrary to the misinterpretation repeated all day on Biz TV, this balloon tells us that LSAP will be curtailed soon. The Fed cannot/does not/may already be the market for MBS. Ally said today its origination pipeline was 0 ! At 40B/month the Fed is 80%+ of the market. Record receipts to Treasury are altering their footprint in Uncle Sam’s obligations also. The CBO projection equates to the Fed eating the budget deficit for the next 5 years at this pace.
To Summarize: The lower UR “guideline” is a Forward Guidance Hail Mary for Optimal Control. 2 parts Jedi mind trick on the weak and 1 part Kevin Bacon telling the crushing mob, “All is well.” It is both a hope to one day leave Oz and return the regime to Kansas and a haunting admission that that day is far off on the horizon, at best.