While Benjamin Strong was the "Governor " of the NY F_E_D (today called the President, more than one biographer called him the most influential F_E_D member of his time. Strong, in a nutshell, introduced asset purchase programs as a means of managing the economy and as the US exited WWI with a recession looming, Strong's actions are credited with the "saving" of the US economy and the ensuing "Roaring 20's", a time of economic expansion. the only thing and perhaps where Bernanke felt the story deserved to end was at Strong's death in 1928, a year before he got to see what the ultimate outcome of the F_E_D's actions and asset purchase programs led to, THE GREAT DEPRESSION.
In any case, I'm certainly not going to post a history lesson, but I think it's worth understanding the basics of where Bernanke's policies , as a "Scholar" of monetary policy, originated fro and what the end results were, but that's for you to pursue if you are so inclined.
What I've held since QE3 was introduced, was the F_E_D was already, even as they were introducing a new QE program, looking for the way out. As former F_E_D governor, Kevin Warsh, a former member of the F_E_D Board of Governors had said around the same time, (and I paraphrase), "Entering Monetary Policy is the easy part, it has always been the exit that has been the difficult and dangerous part".
Long term members know what my position on QE is, in short a stealth bank bailout as the real bank bailouts and other bailouts of 2008 were VERY unpopular with the voting public, especially since the bailed out companies gave themselves absurd bonuses for running their companies in to the ground, so the very unpopular bailouts that voters abhorred were replaced (in my view) with QE which is something few traders understood, average Joe Voter had no idea.
Most of you know that the F_E_D is a hybrid, quasi governmental/private corporation. It's not too different than if Bank of America were given exclusive rights to print money and make monetary policy. While there is a governmental element to the F_E_D in that they report to Congress and remit fund to the Treasury, it also has private share-holders and is a for profit organization/corporation. The name "Federal" is misleading, it would be more like "First Federal of New York", than actually Federal government.
In any case my point about the F_E_D and what I believe is a necessity to exit accommodative policy ASAP, for a reason I could guess at, but I don't know for sure, is how they've characterized the economy and even inflation expectations which they have been dead wrong on forecasting for 2.5 years. The recent "Upgrade" of the US economy at the last F_O_M_C was completely bunk, the Bloomberg Surprise Index (negative) makes this clear...
Today was just another data point showing the economy is not getting better, in fact it appears to be getting worse, however the F_E_D by their own standards can't hike rates if the economy is not improving and if they don't feel like inflation (which doesn't have to be at their target of 2% to hike rates) isn't moving toward or expected to move toward their long term goal of 2% which it has been running below.
It is my belief that the F_O_M_C is intentionally mischaracterizing the economy so they don't put themselves in a corner in which they can't hike rates do to their own standards, thus the upgrade of "economic activity" and long run inflation expectations. It has been estimated that 1/3rd of floor traders have never seen a rate hike as the last one was in 2006, generally speaking they are not good for the economy, usually used to slow down an economy that is TOO HOT, and they are generally not well received by the market.
However it seems the F_E_D is more worried about something other than potentially damaging the economy with a rate hike before it is warranted, whatever this something is (and I could guess at that as well based on the BIS annual report), they seem to be more concerned about it than whatever damage a rate hike will do to the economy.
So for today's latest macro data, NY ISM (Institute for Supply Management) adds to the negative Economic Surprise Index miss with a print of 44.5 with the previous 70.8, a crash from 9 year highs to 6 year lows in a single month with Factory Orders printing at -3.4 vs consensus of -2.4, the biggest year on year drop in factory orders since 2009.
The hypothesis is that the F_E_D will hike rates sooner than expected and possibly faster than expected, this is based on about 2 years of F_E_D actions and statements, the more recent being the more powerful. I hope to determine via the bond market and other assets that are connected to a possible rate hike whether this is a theory that holds water or just a gut feeling as the ramifications are quite important, especially if indeed the economy is not accelerating, but degrading in opposition to the F_E_D's recent upgrade, but in line with the macro data coming in, evidence is in the Bloomberg (negative) Surprise Macro Date Index.
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