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Tuesday, September 15, 2015

Pre-Fed Comment

UPDATE: Once again, the Fed did not hike. I will probably give a longer comment once the dust settles, but I just want to repeat my view that Fed communications this year have been pathetic.

It seems to me that the Fed has dropped enough hints that they will not hike rates at this meeting. I have been somewhat distracted recently (hence the low frequency of posting), but I am somewhat mystified by that stance; in my view, if it will be a mistake to hike rates in 2015, they might as well do it now rather than in December. (I will probably not be able to comment on the actual decision until Thursday Friday.

Realistically, the only economic risk associated with a rate hike would be a strengthening dollar. It may be that The Great Treasury Bear Market Of 2015 will finally happen, but it seems to me that all that would happen is that long-term bond yields eventually go back to the top end of the trading range.  (The front end will necessarily shoot higher to account for immediately rising rates; people with levered front end positions might be blown out.)

But unless we definitely have a recession or real financial crisis (in the credit markets), the Fed is unlikely to wait beyond December. They would be too far away from what their reaction function is supposed to be.

It is very amusing to compare the complete lack of visibility provided by a real-world central bank to the omnipotent central banks of certain segments of economic theory. In theory, central banks are supposed to be able to set nominal GDP to any arbitrary level solely by the force of their will. In practice, the Fed is displaying an inability to lead the way out of a wet paper bag.

(c) Brian Romanchuk 2015


  1. Love the final sentence! (...and nice jab to the NGDP crowd)

    1. Thanks. The gap between (some) theory and practice is amazing at present.


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