What the F_E_D Really Said & Has Been Saying

In the F_O_M_C minutes released at 2 p.m. today one of the bullet points was voting members were uncomfortable with forward guidance, this is nothing new, they were uncomfortable with it nearly a year ago when they changed guidance from quantitative to qualitative, which is like going from the old guidance of "Rates will be kept at ZIRP until at least Q1 2016", whereas Quantitative Guidance (which seems reasonable) allows the F_E_D to make it up as they go along. No one can count on guidance from the F_E_D as it's now "data dependent" which again seems reasonable, but the F_E_D has always forecasted based on the data,  this neat little trick allowed them to up-end guidance completely on an arbitrary basis as we all should know by now that the unemployment target of 6.5% which was suppose to end accommodative policy is easily manipulated by cutting extended unemployment benefits as was done earlier this year in the Congressional budget, 99 weeks was no longer funded and in Florida anyway, it's back to a measly 16 weeks, half of what it was before extended benefits (use to be 32 weeks). As the unemployed falL off unemployment benefits, THEY ARE NO LONGER COUNTED AS PPART OF THE WORKFORCE, (some 3.1 million this year alone).

In other words, lower unemployment now is largely a function of the unemployed no longer being counted as they are considered to no longer be a part of the work force and thus, "NOT UNEMPLOYED"!

The same tricks can be used to just about any data series whether through revisions or seasonal adjustments that are totally arbitrary, the F_E_D and government can create virtually any set of numbers they want with a little finesse.

The old guidance of 6.5% unemployment rate also considered their dual mandate of price stability which is around 2% inflation, however the inflation trend has been hot which seems to be one of the reasons the minutes were more hawkish today as inflation is just about at the F_E_D's mandate.

"participants generally agreed that labor market conditions and inflation had moved closer to the Committee’s longer-run objectives in recent months, and most anticipated that progress toward those goals would continue. Moreover, many participants noted that if convergence toward the Committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated. "

The F_E_D speakers and meetings have continuously been warning the market to expect rate hikes a lot sooner than later, take Bullard's "The Market is Wrong" interview on Fox Business in which he said the market doesn't realize how close the F_E_D is to attaining their mandate,  which means, the market doesn't realize how much sooner than formerly expected rate hikes will begin.

Today was another reiteration of the same that's been heard at least a dozen times, even from Yellen herself, if you missed it, you haven't been listening to what the F_E_D has been saying.

"Indeed, some participants viewed the actual and expected progress  toward the Committee’s goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the Committee’s unemployment and inflation objectives over the medium term."

Put another way, the F_E_D is not concerned about overshooting on unemployment, but rather on inflation. You can go back about 5 months and you'll see I've been consistently posting that the one thing that ties the F_E_D's hands and leaves them no choice but to hike rates is the inflationary trend getting out of control,  this is nothing new, it's just being yelled now instead of spoken.

"These participants were increasingly uncomfortable with the Committee’s forward guidance. In their view, the guidance suggested a later initial increase in the target federal funds rate as well as lower future levels of the funds rate than they judged likely to be appropriate"

This speaks for itself... Participants are essentially saying in an official forum rather than FOX news that rate hikes are coming sooner than later and will be larger than expected. You may recall from Yellen's own words, the committee expected rates to be at 1% by the end of 2015 which essentially means rate hikes are right around the corner and they'll be successive assuming they are done in 25 bps increments,  this is a market slayer.

While we're on the subject of guidance ... there was this gem (although not the first time it has been mentioned)...

"The (FED's) Balance sheet should be cut gradually, predictably"

With over $3.5 billion in balance sheet expansion from accommodative policy, the Bank for International Settlements" in its annual report questioned whether "Leading Central banks" would have the ability to respond to even a run of the mill recession, in other words the F_E_D's balance sheet is tapped out which is likely one reason QE is ending other than the market bubble and inflationary concerns.  However, initial guidance from Helicopter Ben" was that assets on the F_E_D's balance sheet would be allowed to roll off at maturity, that's not the same as reducing the balance sheet. 

I'm not sure what the angle is here other than the fact the F_E_D has absorbed most quality collateral which has forced banks to use the 1-day reverse repo facility at the end of the month and quarter for window dressing to make it look like they had collateral when in fact they only "borrowed " it from the F_E_D for a single day, the last day of April and the last day of Q2 setting the second highest usage for the facility in April and a new record high at the end of June as they dressed their windows to make their financial condition look better than the mess it truly is. It seems among the 94 banks that participated in the "Art of looking smart" for the end of Q2 (the very last day mind you), there's about a 1/3rd of a trillion dollar shortfall in collateral at the banks. Perhaps this is one reason the F_E_D wants to cut its balance sheet so banks can pick up some much needed quality collateral, of course the inability to respond to a garden variety recession may be another as the balance sheet is bloated. A third reason may be the fact that the F_E_D (yes the F_E_D) has shareholders and is a "For profit" quasi-public/governmental corporation, not much different than Bank of America being given exclusive rights to print money and set monetary policy.

The F_E_D's unofficial mouthpiece, Jon Hilsenrath of the WSJ summed it up with this, 

"The minutes of the meeting, released Wednesday, provide fresh evidence of an intensifying debate inside the central bank about when to respond to a surprisingly swift descent in the unemployment rate and rising consumer prices."  Emphasis added, although probably more appropriately to "Rising consumer prices" otherwise known as inflation, just what we've been warning about as the one thing that ties the F_E_D's hands, although that was when they were still playing the "Accommodative policy in place for a considerable time after the end of QE" card, which is now clearly moving off the table.

The bottom lime is the F_E_D has been planning their exit the very same day they announced QE3 when they hinted at using a different yard stick, the initial stage was being set to move from quantitative guidance such as a specific date to qualitative guidance which as I said, seems reasonable, but qualitative guidance s used in putting forward quantitative guidance, it was really nothing more than a way to move to arbitrary decisions and remove the one thing the market craves, certainty.

Since that day when the debate about the yardstick started, the F_E_D has been on a steady path of extracting itself from accommodative policy even as they introduced the newest and last QE program.

If you wonder why market breadth looks the way it does or why High Yield Credit fell off a cliff, it's simply because they understand what the F_E_D had been subtly hinting at, now they are saying it up front and with a louder voice, it doesn't get much louder than, "The market's are wrong" from a regional F_E_D president, but for now, retail is more than content to keep whistling past the graveyard and buying the dip even though they apparently have no idea what supported buying the dip in the first place and the fact that it's rapidly disappearing at the rate of $10 billion a month and will end completely in October. That doesn't mean buying the dip is a good idea until October, the market ALWAYS front runs the F_E_D and this is a mess the likes of which the world has never seen, at least no one alive today.