Fed: You can't handle the truth!

What is the Fed seeing that I don't. Nothing, they just want to keep up the pretense because the market can't handle the truth.

The Fed have said that they are data dependent and therefor they have not committed to do anything by design. We had Fed's No.2, Fischer, speaking out after Yellen at the Jackson Hole that somehow got the market excited by the idea of GDP picking up and there being an imminent rate hike on the way. He was also speaking again today on Bloomberg advocating again for a rate hike while reinforcing the idea that negative rates are not something on the cards at the FOMC while being sensitive to what is going on in the rest of the world, such as in Japan, and he said that they are not planning to do anything in that direction while being in a fortunate position that rates are not negative or have to be negative. Well, I just want to pick up on that. 

Firstly, negative rates were something that were left out of Yellen's speech at the Jackson Hole, but of course, as that would not have gone down with the Fed's current mantra and renewed attitude of late that markets have decided as meaning the Fed is shifting to the hawkish side while telling us that the US economy has started to improve in recent months. Has it? Anyway, it was only in May of this year that Yellenactually wrote to congressman, Brad Sherman, and said “While I would not completely rule out the use of negative interest rates in some future very adverse scenario, policy makers would need to consider a wide range of issues before employing this tool in the United States, including the potential for unintended consequences.” She also wrote, “By some accounts, these policies appear to have provided additional policy accommodation,” Yellen wrote. “We certainly are trying to learn as much as we can from the experience of other countries.”

So, can you see the contradictions between what Fischer is advocating to Williams is, who a couple of week's ago said that we are in a new norm when pointing to increasing the inflation target and government deficits and how Yellen is leaving the door open to all options? I wrote on that here: How to play, "The New Norm for Dummies"

Secondly, the over hyped up speech at the Jackson Hole was relevant only to the point that markets took the outcome as Hawkish. How was the discussion of a quarter point in either September, December or both at all hawkish? To me, that is just a less dovish approach than being hawkish. 

Hawkishness is supposed to be portrayed by a bird of prey, a monetary policy that one should be fearful of, that doesn't care much for direct and immediate impacts on the consumer or market. If anything, the speech was contradictory and simply by saying that "the case has increased" for a rate hike shouldn't be taken that the Fed will raise rates. What, has the case gone from zero to about two out of ten? And that is supposed to be hawkish?  Economic data doesn't tell me that the economy is strengthening and Fischer never said that there will be a rate hike this year, he simply said that there wasn't anything in Yellen's speech that wasn't consistent with the 'possibility' of a rate hike and yet the markets took off and somehow what he said was very hawkish. 

Yellen implies - "You can't handle the truth!"

Reading what Yellen said, when talking about asset purchases and thinking about broadening the type of assets of what they would buy should have been a very bearish statement for the dollar along with the mention of the Fed's policy tools of a further round of asset purchaseprogramme of $2 trillion (QE) ahead of the next recession. But, the market isn't ding hat it is supposed to do and by or sell the bigger and longer term picture, which is a sign that we are indeed in a huge bubble that is about to pop.

Yellen talked about the balance sheet and that they have failed to wind down their portfolio, something she promised to do before they began to lift rates and here is why she hasn't or can't. Selling treasuries would push up long term rates and mortgage rates and make huge losses for the Fed that congress would have to make up. Essentially, the Fed can't sell their bonds if they don't want to pop the bubble and she has told us that she has changed her mind - funny that! Instead, her new plan is to stop reinvesting the principal or interest that they earn on these holdings. I would like to see that happen too because I know that they can't because they have to keep rolling over their positions, otherwise,  if the bonds mature and the Fed doesn't roll their position, the Treasury would then have to pay the Fed and therefore they will have to sell bonds into the market. So, you see, they can't run down their balance sheet? This is where she doesn't want to say the truth, because, like Jack Nicholson put it in a Few Good Men, the market "...Can't handle the truth!"