WOW, As I Suspected, The F_E_D Changes the Yard Stick Again

This time, even more arbitrary.

For the first two QE and Twist programs, the F_E_D gave a date when they'd start and a date when they'd end. The first hint I had back in 2012 that the F_E_D was looking to exit accommodative policy LONG BEFORE they ever hinted at it was when they changed the yardstick in which guidance was measured from a definitive and unambiguous calendar date which the market could depend on to "Data Dependent" and we all know how easily data is manipulated, right now there's an investigation in to manipulation of unemployment rates before the 2012 election.

Now the F_E_D says...

Re: When QE Ends...

"They generally expected that the data would prove consistent with the Committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months. However, participants also considered scenarios under which it might, at some stage, be appropriate to begin to wind down the program before an unambiguous further improvement in the outlook was apparent."

First we ALL know that the only way the unemployment rate actually moves down is because of the historic number of people dropping out of the labor force, it's a facade. In addition, they are considering winding down BEFORE the improvement that is easily manipulated even without the massive outflow of workers from the labor force participation rate.

THIS IS THE NEW YARD STICK, IT IS 100% AMBIGUOUS WITH NO CONDITIONS AT ALL! THE MARKET IS GOING TO HATE THIS!

"As an alternative, some participants mentioned that it might be preferable to adopt an even simpler plan and announce a total size of remaining purchases or a timetable for winding down the program. A calendar-based step-down would run counter to the data-dependent, state-contingent nature of the current asset purchase program, but it would be easier to communicate and might help the public separate the Committee’s purchase program from its policy for the federal funds rate and the overall stance of policy."

TWO THINGS, FIRST CHARLES EVANS TWEET YESTERDAY...

This was yesterday, it barely moved the market and some wondered if it was tongue in cheek, if it was out of context, or if it was a floater to test a policy idea that was clearly discussed as seen in the minutes, "A total size of remaining purchases". This tweet is essentially exactly that, although dates and amounts are obviously somewhat fictional.

SECOND...

"A calendar-based step-down would run counter to the data-dependent, state-contingent nature of the current asset purchase program, but it would be easier to communicate and might help the public separate the Committee’s purchase program from its policy for the federal funds rate and the overall stance of policy.""

This confirms exactly what we talked about this week, the last time QE Taper was serious in May/June, the 10 year rate popped 1%, the F_E_D is very afraid that the early guidance of quite a while ago that "Rates would rise about 6 months after QE ends" is still with investors and this is what smart money is most concerned about, RATE HIKES.

This confirms the F_E_D is very concerned and trying to separate a QE Taper from Rate Hike expectations, which are accommodative policy as well.

The minutes seem to confirm they will end treasury purchases BEFORE MBS, remember QE1 started in 2008 with MBS purchases, but had absolutely NO EFFECT and the market dropped lower until the F_E_D added Treasury Purchases to QE1, that was the 2009 bottom and the market went up, so the market WILL NOT like Treasuries being tapered first, it might as well be all of QE at the same time as traders don't care about MBS.

" For example, most participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage, although the benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions."

This shows their fear as they consider a useless program just to reinforce guidance and convince investors they won't raise rates before they say, but the market will do that for them as it did in May and that's what they fear, the F_E_D ACTUALLY LOSES CONTROL OF POLICY AT THAT POINT AND THE MARKET SETS RATES!!!

MY READ...The F_E_D would end QE right now and the thing I wondered about a while ago, "WHAT IS THE F_E_D SO AFRAID OF"  is now clear, it's not unwinding a nearly 4 trillion dollar balance sheet which should really scare them, it's the reaction to tapering QE in interest rates that scare them.

Remember the June minutes when they sounded like they'd end QE by the end of this year, half of the participants were for ending QE by the end of 2013, THEN THE NEXT F_O_M_C WAS THE ABSOLUTE OPPOSITE? The reason why is because of the 1% jump in the 10-year benchmark interest rates, that's what scares the F_E_D, that's what they've been trying to figure out how to deal with as it takes policy right out of their hands. Even the "Ambiguous" possible end of QE discussed that had no threshold at all, it was arbitrary, just a decision to stop shows how willing they are to end QE any time, right now if they could, it's how the market reacts as it fears they will hike rates soon after, that's what the F_E_D fears.