It’s Deplorable! The Federal Reserve’s Regulatory Pneumonia Out in the Open

The Fed used 3 stooges to test market opinion & adopt a dovish stance

In a week well-marked by Madam Secretary, Hillary Clinton’s pneumonic seizures catching the political world’s attention, the Fed’s tarzans swung from tree-to-tree, roiling the capital markets. What’s lesser known, however, is that just as Hillary Clinton’s unease was really not pneumonia, the Fed’s swinging stance on raising interest rates was really part of a hoax. Make no mistake – the Federal Reserve is masquerading as a hawk deep inside dove territory, as it tries to carefully crawl its way out into the open without being preyed upon.

c1

The Fed seemed to test the waters before muddying them – a predetermined move – very similar to the events preceding the rate hike in December 2015. Peter Schiff calls it “sending out a trial balloon” of rate hike talk before finalizing what to do. “Quantitative talking,” “Open mouth operations,” just to borrow a couple more phrases from the real Dr Doom!

Is it all just a show?

The representatives of the Federal Reserve – either from the member banks or from the Federal Open Market Committee (FOMC) – are rolled out to talk to the media, they take a strong position in front of the market (Of hiking rates in this instance) and then they gauge the feedback. Based upon the reaction on (Which was extremely negative on Friday, 9th September), the Fed can position its speakers to go whichever way it desired – raise interest rates, maintain them or cut them (Maintain them, in this case).

c3

To start off, in the week prior, San Francisco Fed President John Williams, a known centrist, gave a rather hawkish speech, which was in the face of some fairly bearish data in August just 12 hours earlier (Aug Fed Labor Market Conditions Index (A: -0.7, P: 1.0, F: 1.5), Aug ISM Non-Manufacturing PMI (A: 51.4, P: 55.5, E: 55.0)). The markets declined somewhat: over the following two days, the S&P lost 0.2%, and the US Dollar gained the same amount. And then, as if to compound the error, Boston Fed President, Eric Rosengren, a known dove, came in and gave an even more hawkish speech on Friday morning. By the end of Friday, despite the best efforts of Daniel Tarullo to insert a dovish narrative, Crude Oil lost 3.2%, the Dollar index climbed 0.3% and the S&P 500 lost 2.5%!

The adverse reaction forced the Fed’s hand on Monday, being the last day before a blackout period on public comments related to monetary policy ahead of the FOMC meeting next week, and dovish speeches spewed forth from all directions.

c2
Source: The Federal Reserve official website, Bloomberg, Thomson Reuters

Accordingly, the 3 main speakers on Monday, 12th September, were (1) A centrist – Atlanta Fed President & CEO, Dennis Lockhart, (2) A dove, Fed Governor Lael Brainard and (3) Lesser known, but evidently a hawk, Minnesota President Neel Kashkari. And they all dove for cover, desperate to stay the course of easing.

Particularly surprising was Minnesota President Neel Kashkari’s ultra-dovish interview on CNBC. Also, albeit that the centrist Atlanta Fed President & CEO, Dennis Lockhart’s speech was only mildly dovish, he excused himself from offering an opinion on what will likely be done in future Fed meetings, citing the fact that “Financial markets seem to be very sensitive to remarks of Fed speakers.” He conveniently proceeded to proffer a number of forecasts and estimates in his speech of nearly 1,900 words, offering a wide range of opinions.

The Fed’s political maneuvering is not in good faith

The Fed’s behavior has been as deplorable as Hillary Clinton’s pneumonic cover up of her health issues, which could disqualify her from running for the highest office. No discerning student of capital markets should take the Fed seriously. The Fed was never seriously contemplating raising interest rates with the integrity of a rigorous regulator, else interest rates would not be as low as they are in the first place.

 

 

Advertisements