The F_E_D's Fisher Dials Down Expectations For QE

In last night's post, "The F_E_D Has Been Warning Since September 13th 2012", I talk about how the F_E_D and F_O_M_C policy statements, press conferences and minutes have all been "slow boiling the frog", which refers to the concept of boiling a frog. If you throw a frog in boiling water it will quickly jump out, but if you put it in water and very slowly turn up the heat, the frog won't notice until it's too late.

I talked specifically about the analysis we've been conducting here that recognized immediately upon the F_O_M_C statement of September 13th, 2012 and the subsequent press conference, that although they gave us QE3, the tone of the F_E_D had changed substantially and they were moving toward changing the yard stick for policy accommodation and at the same time, slowly reducing expectations as  the F_E_D for the first time, openly talked (albeit in a round about way) about the end game , whereas they had never mentioned anything like that, only that they have more tools and stand ready to do whatever is necessary, the tone has changed a lot since then.

Yesterday John Williams, President of the San Francisco F_E_D, said that the F_E_D could begin tapering accommodative policy as soon as this summer, that's a far cry from the calendar based guidance of the last few years.

Today the Dallas F_E_D's Fisher talked about "TBTF" financial institutions and how Cyprus has seen its entire economy held hostage by bank failure ad Too Big To Fail institutions, adding "We cannot let that happen in the U.S. ever again and the American people will not tolerate it.".  As for regulation, he's disappointed in the pages and pages of legislation represented by the Dodd-Frank bill that "needs repair" and stating his preference for a simple statement that could be written by a 6th grader, "a simple statement saying they understand there is no government guarantee... It could be written by a sixth grader".

Additionally he mentioned, "QE "is not a Buzz Lightyear policy...this will not go on forever." He admits there are limits to their (and implicitly the ECB or BoJ) policies - "we just have to figure out what they are." Then goes on to explain why he believes the Fed's policy should be "dialed back".

On whether Japan's accommodative policy will force the F_E_D to keep monetizing...

The rates are already very low in Japan. I think people will want to wait and see how successful the program really is. Does it put pressure on us to continue? No, we have to conduct monetary policy according to what we feel is best to get our economy moving.

There has a consensus on the table to pursue along these lines of quantitative easing. I have voted and spoken against it. There is no QE infinity. I have never heard an argument at the table from anybody that we will take the Fed's balance sheet to $5 million or whatever number. We already have a very active program. The chairman spoke about this at his press conference. We have to judge the efficacy of what we're doing and either dial it back or dial it up a little bit. This will not go on forever and ever.

On whether he's likening the situation in Cyprus to the situation that the U.S. could face if Dodd-Frank isn't repaired:

"No, I'm not. I'm saying that to solve a problem during a crisis is a lot harder than when you're on a level plane. That's where we are right now thanks to Fed policy and other actions that have been taken. We can deal with this now. There is bipartisan accord that too big to fail has not been solved. There is bipartisan agreement, and even the attorney general admitted he is afraid to prosecute these large institutions for whatever their misdeeds are because it might create economic damage. The problems are still there. Now that we are in economic recovery, we can deal with the problem. It is a different situation. The reason I mention Cyprus is because you have an economy that is held hostage by bank failure and institutions that are too big to fail. We cannot let that happen in the U.S. ever again and the American people will not tolerate it, so let's solve it."

I wouldn't be surprised if Bernie started sounding a lot more like Fisher and Fisher started getting a lot more airtime on behalf of the F_E_D. I think Bernie is starting to come to terms with the nightmare that is normalizing policy, he's admitted as much is saying further purchases need to be looked at in terms of what they can achieve vs. the risk, in essence further purchases are at the point of diminishing returns and will only make the normalization process that much more painful.

What does this mean for the market? Just like QE3, the market will always try to front-run the F_E_D, just this time everything will be in reverse.