When Doves Fly!
As expected, or should have been expected by all, the Fed remains accommodative and dovish. The market bounced as expected, but there are some interesting disconnects, as if not all believe what they heard. Some still heard “hawkish” tones, even though nothing in the statement reflected that. Could it be they are more focused on the ending of QE, expected in October?
When Doves Fly
All the talk in the media was about a term in the FOMC statement, “considerable time”, when referring to interest rates. I wrote a Market Preview, injecting a boat load of sarcasm, as to how the market is focused on adjectives rather than actual policy.
A review of their FOMC statement, reflects it has remained as Dovish and practically unchanged since Yellen has taken the helm at the Federal Reserve. Interest rates remain at zero as they have for years and are expected to remain at zero for “considerable time”, while they continue with their QE program, which like QE1, QE2, Operation Twist, before, is slowly winding down. However, the language in the statement and Fed history shows that it can easily start up QE4 or some other accommodative policy. You can read the changes in the FOMC statement here. As you can see the few words that were changed don’t change the tone of the statement at all, it remains dovish. How anyone can read “hawkish” tone is not reading the same FOMC statement I am reading. The only big changes were; “economic activity rebounding” to “economic activity expanding at a moderate pace“, “unemployment rate declining further” to “unemployment rate is little changed”. Lastly, as expected based on the taper rate, the current program will end in October, so that is no surprise either.
Yet for all the talk about the word’s in the statement the facts on the ground is that Fed monetary policy has NOT changed in years and the Fed does not plan on changing it for the foreseeable future. How one defines exactly “considerable time” is debatably, yet it remains vague enough to mean months or even years. Fact is nothing has changed and the Fed remains in their status quo stance.
What is now getting traction is the Dot Plot. This is another silly chart of where each FOMC member is polled into where THEY believe Fed Funds rate will (should) be. Yet it doesn’t really matter in the end, since the Fed “Committee” is not really a democracy, the votes are only used as a footnote in the FOMC statement. Ultimately the Fed Chair, Yellen, can set forth a change against the majority of the “Committee” and it will stand. Yet, the Dot Plot does make for some interesting interpretations. One can easily make a reasonable assumption which dot belongs to whom. I would wager the dots that are for higher interest rates are from our two well-known Hawks, Plosser and Fisher. While the dots that are for very low interest rates are from Yellen and her Vice-Chair. It is interesting that there is a general consensus that in the “long-term” (which is undefined) that rates should be higher and more representative of a FREE MARKET, in which rates are determined by risk and the laws of Supply and Demand, rather than rates being arbitrarily set by what some describe as a cabal of vested interested parties. Yellen was asked at her press conference which dot was hers, she declined to answer. For now it remains anonymous, but I will put to you the only dot that counts is the Fed Chair who sets the policy.
Courtesy of Business Insider
Can her FOMC members convince her otherwise? I doubt it, Fisher and Plosser dissented in the last FOMC meeting and the President appointed governors all drink from the same Keynesian Kool-Aid, she will have no dissenters among her governors, only the non-appointed Fed Presidents will speak out. Unfortunately at the end of the day the Fed is not a democracy, votes don’t count, and the governors are all on the same side of both political and economic ideology.
Shift of Power
There is one thing that I have noticed since monitoring the Fed since the early 1990s, the shift of power has moved slowly towards the governors who are more aligned with political ideology. Of course, unlike the Fed Presidents, the governors and Chair are appointed by the President of the United States. It is only logical, much like the Supreme Court, that the President appoint those with similar political leanings. Perhaps this change has also come about as we see more government interventionism and the need for the Fed to be closer aligned with politics rather than banking and economics.
There is no argument from me that our Congress (both Republican and Democrats) have failed in making any fiscal policy. Obama has only further alienated bi-partisanship and has failed to lead this nation in economic reforms needed to see any sustainable and even real recovery. A budget would be a starting point and the first time in over 40 years our newly elected President ran a nation in peril without a budget, not for a few months or just a year, but for years. Fiscal policies became stalemate all-or-nothing battles on the Congressional floor. Sadly the only agency, devoid of democratic decision making process, the Federal Reserve, has used monetary policy to substitute for a lack of fiscal policies. Yet monetary policies can only buy time and have been running for well over 6 years and most likely longer, at a level described by the Fed as “extraordinary emergency measures”. It has become the norm, not only for the markets and our nation, but even our Congress has turned towards the Fed as best defined when Sen. Schumer (D) told Bernanke to print more and do more because Congress WOULD (not “could”) do nothing.
I predict that the Fed will soon gain even more power, far beyond just the recent ability granted to them at the start of the Financial Crisis to run radical programs like QE. The Fed may retain the ability to set FISCAL policies as well. This could easily be justified because they are charged with a “Dual Mandate” that includes not just “price stability”, but also “full employment”. Please note we are the only nation that has charged it’s central bank with a mandate of “full employment”. Yet any grad school economist can tell you that it is virtually impossible to be tasked with a mandate to increase employment if one only has control over monetary policy. We may all concur that controlling interest rates have some antidotal evidence in some “butterfly” / “trickle down” effect on employment. At most it is conjecture, there is, as we have recently seen, no direct impact or effect in interest rates and employment. For if there was, running an absolute ZERO interest rate policy for years SHOULD mean that we are running AT Full employment by now, but we are no where close. There is no doubt in my mind as the evidence speaks clearly for itself and the Fed has concurred in their own FOMC Statement, unemployment and job creation remains a huge problem. QE and Zero interest rates have certainly worked for the equity markets, banking/finance sector, and international business, however it has not worked very well for the domestic labor market. Frankly, we shouldn’t expect that it should.
Congress would be glad to give the Fed more fiscal powers and the Fed and Congress could justify a transition of fiscal powers, if the Fed remains charged with the mandate of “full employment”. For if they don’t have the tools to do the job then the tools should be given. Congress appears more interested in debating “hot topic” political issues like gay marriage, abortion, immigration, gun control, and all the traditional social issues that they are easily able to market to their base for votes. Fiscal policies and economics are boring and I would argue most of our Congress and Senate members fail at even basic math. They would be happy to relinquish the fiscal powers that would deal with economics to the Fed. Not to mention if anything fails, they will now be able to play the “blame game”, which is game they have mastered.
Elizabeth Warren – next President? courtesy of wikipedia
Today my prediction may seem bleak and concerning, it may even be called “fringe” or “ridiculous” and it should be. However, when the time comes and it may very well come to pass, it will be boxed, wrapped, and sold to the people as the right thing to do and it will “help” the country and if that does not work “fear” is the great motivator. To quote Pelosi (D) “If we don’t pass this bill, 400 million people will lose their jobs!” (note: she is one of the members of Congress that failed basic math). When the time comes it will be accepted, much like TARP, QE, and Nationalizing businesses, bailing out GM, nationalizing the failed GSEs, and a host of other issues that were once thought ridiculous or fringe.
We may get an adjective or two to change in the next FOMC statement, but we will not see any REAL monetary policy changes. The next meeting in October is right before the mid-term elections, the recently President appointed Chair and her fellow governors are aligned with the politics that put them into power. No, they will not rock the boat regardless of economic data – the mid-terms are far too important.
They may let the dollar strength play into the mid-terms, as it lowers prices makes potential voters optimistic as they can get a little more gas in the tank, buy a little more food, buy the new iPhone, and enjoy Monday Night Football with extra beer. However, when the mid-terms are over we will see the power of the Fed brought to bear on the rising dollar as Yellen braces for the devaluation currency war against Japan and Europe, who now are winning the race to the bottom. A strong dollar is the exact opposite of what QE and zero rates are trying to do. Expect more accommodation, not less.
Courtesy of insiderlouisville
I suspect we will see the likes of Steve Liesman (Keynesian Economic Reporter CNBC) and his fellows’ parade around in a few more weeks before the next FOMC meeting. They will talk about adjectives and words in the Fed FOMC statement again and most likely inject some volatility in the market, as they did this time. However, at the end of the day we will be left with a Fed running Zero interest rates and finding new ways to accommodate.
The equity markets have reacted exactly as expected, zero interest rates means bonds yields remain unattractive and money is cheap, the market will rally (period).
Bonds have seen a slight sell-off, which forced rates in the 10-year up to 2.6%. There is a little concern with the winding down of QE3 that without the Fed we might see yields rise further. However, I don’t think the Fed is out of the game, perhaps in name only. A steepening of the yield curve will stall the economic recovery, we can’t have that. I suspect that we are already close to resistance in yields (support in bonds) at the 2.7% range. I was in the minority that believe rates would get to 2.4% earlier this year, I still believe we will see rates remain under pressure and we will not see a steeping in the yield curve, even at the end of QE3. QE4 or something different in name only is already loaded ready to fire.
The dollar index has pretty much topped out and could remain in this upper range into the mid-terms, if it means keeping a lid on gas and food prices. Got to keep voters optimistic heading into November 4th, however that will change and we should see the dollar index decline again. Looking at the Yen and Euro chart, it looks ugly and I am not sure that Yellen can sleep at night as the US dollar continues to strengthen. She will probably just need to take some TUMS for the next couple of weeks and bare it as the nation waits for the mid-term elections. I suspect we will start seeing a short dollar on the dollar/yen and dollar/euro trade heading into mid-November, taking advantage of Yellen stepping on the accelerator after the mid-terms.
Commodities will remain under pressure as the over-supply in the Yen / Euro force the dollar higher and drive down dollar derivative priced commodities. This could be lining up for an excellent buying opportunity when this turns around. For now commodities will remain under pressure, but when this turns around it could be fast and hard. Watch the dollar, it will determine the action.
Support & Resistance
Long live the Doves! Market is in rally mode as it received confirmation that nothing has changed.
The FOMC is over and the Doves rule the day. Time to get in line to buy an iPhone.
Get long, sell calls and watch the VIX drop like a rock. The Doves have spoken.
Seems like order flow is heading back in, 1140-1160 could be the support range. However, as much as the narrower based indices are waving the victory flag, don’t get too comfortable until you see this index break solidly above the 1170 area and turn that into support.
I will admit I love watching the Fed games and economics as much as I love watching Miami beat the Patriots. If only the rest of the nation could take interest in economics and our Federal Reserve, perhaps John Grisham could right an exciting novel or make a movie on the subject that would capture a wider audience and bring interest. I really don’t care what brings people to the table to take interest. The fact remains, it doesn’t matter if you are black or white, gay or straight, old or young, rich or poor, Pro-life or Pro-Choice, Jew or Christian or any of the issues that divide us socially. We all earn and spend dollars and the Fed policy affects each and every one of us. It is time to take notice, to garner an inkling of understanding, to pay attention – your future and children’s future are far more impacted by the Fed than you can possibly imagine.
Now it is time for some Football – GO FINS!