Fed Monetary Policy 2016 to 2017

A Fed Statement for market move purposes is defined as Inflation and Interest rates up or down then GDP and the economy up or down. Monetary policy is a quasi legality and is defined by vote to solidify the objective. Monetary policy adopted by vote becomes accepted until or unless its eliminated by another vote. Older monetary policy adopted by vote is written forever in the statement such as the Fed SOMA account and Swap arrangements with other nations. Written means use the exact same words month after month.

New monetary policy must succumb to a majority vote such as January 2015 adoption of Repo Markets, January 2016 adoption of new Inflation language, January 2016 adoption of new Unemployment language and QE, January 2015 adoption to longer term FX holding periods from 18 to 24 months. Today, Minutes are 10 + pages as a result of Keynesian policy under full market control over many decades.

Why lazer focus in what appears as minor changes to policy is vital because modern day Fed policy, information, minutes and statements reveal zero to no actionable information especially in relation to past decades. The Fed speaks and writes but says nothing. Students of the markets must perform due diligence and do their homework.

The December 1925 Fed Bulletin for example contained 84 pages of deeply detailed charts as well as a plethora of economic / market statistics and information. American markets were built on Agriculture yet AG is missing from today’s statements. Credit extension and interest rates built America yet today’s statements afford a few minor words to an OIS rate or a spread.

Bank health, troubled banks, borrowings and financial holding information is missing, money supplies are missing, Fed economic projections are revealed only 4 times yearly and the information is always wrong. The modern day Fed blacked out and quarantined necessary economic and market moving information. Fed statements from 84 pages are down to barely 10 and much is non information. The counter argument to today’s markets are more efficient doesn’t hold as 1925 market focus remains the same factors today.

As 2016 and 2017 is reviewed, the depth and degree to Queen Yellen’s deeply conservative, unyielding ideology is known and it turned to the poison of social justice. If Yellen was a voter, only the Democrat party is her choice because of the concepts of negativity and control. Yellen thoughts are forced to see rain as dominant on a sunny day. Those deeply negative feelings experienced daily transforms by osmosis into policy and market control. The concept of a free market and a random price would drive Yellen into pure insanity as the price lacks control and lack of control becomes fear of the unknown.

Life under true price discovery is seen by Yellen to quote Thomas Hobbbs as a war against all where market life would be poor, nasty, short and brutish. Without policy control, markets would crash as a war against all would ensue to quote Hobbs again. Men under their own devices would self destruct. An unsatisfactory price to Keynesians is a market disturbance rather than normal functions of markets.

As Yellen felt the strengths of her savior/ power to the rescue, QE was adopted to control money, Repo markets were adopted to control fed funds, QE recission was adopted to control money’s trip downward. Without a plan, roadmap, structure and control, Yellen wouldn’t nor could she move. Control is hard as more energy and time is expended to complete an unknown market roadmap. Interesting question is without control, where markets would be today if markets were allowed full correction on its own.

Yellen’s negativity as dominant was on social justice display January 2016 as unemployment was adopted as a new policy and reporting requirement in the statement. Why not focus on the positive employment is because employed person positions are known, fully covered and fully controlled. The randomness of the unknown in the unemployed drives Yellen and Keynesians to the brink of mental disaster.

Long term Unemployment is now viewed as a median rather than central tendency and the Social Justice Keynesians delineated unemployed to Asians, Blacks and Whites rather than an overall focus on specific industries for market / investment purposes as was done in 1925. Employment / Unemployment lacks Fed direct influence as its classified as the result of Fed policy and gleaned from the short term Output Gap therefore focus as new policy is challenging. A full view to Employed / Unemployed requires a data check to its Feb 1939 inception and simple averages is enough because Medians are always wrong.

As January 2016 long term repo rate holding periods were established as 65 days, the Fed is now taking a longer term view in continuation to hold Fed Funds in its 25 point range, specifically at the mid point. To accomplish this mission, Repo rate floors as well as the 1.25 basis point interest paid on reserves must hold. Only then will Fed Funds rise again.

Why mid points is to allow brisk Repo lend and borrow against a 12 point channel above and below. To further guard against longer term plans, QE rescission was done to not only assist to hold Fed Funds steady but if Fed Funds falls below its channel or crashes, the Fed is prepared to institute new QE spending.

As money supply and interest rates share an adverse correlation, the Fed message is not only will the floor hold but a new floor will establish upon the next raise to Fed Funds. Repo market participation is key otherwise Fed Funds is vulnerable to trade outside its 25 point range. The current range is 1.00 to 1.25 and 1.75 as the Primary penalty rate for banks and borrowers in trouble. The 1.75 is the Discount Rate and the discount window to borrow at 1.75. The 1.00 point is known by other central bank terminology as the Treasury Funding Rate.

The mid point and monetary policy success in Keynesian terms is hold the channel particularly against higher Fed Funds. A higher Fed Funds means more slow and dead volatility remains but market prices will operate against the next highest range plateaus.

The 65 day or less new holding period represents 2 Fed Maintenance periods at 70 days, 2 Fed meeting periods and /or 3 months if viewed from 20 trading days per month. Knut Wiksell is alive and well.

The topside to 1.25 is  protected by interest reserve payments and by 3 month Libor at 1.46 while the OIS spread at current 0.30 protects Fed Funds to trade to zero. Viewed from American markets specifically, OIS runs from 0.13 to 0.19.

In normal market trading, bottomside Fed Funds is protected but if markets crash, Fed Funds is vulnerable and this explains the Fed’s cautious approach, the long term view and the slow rise to Fed Funds despite the 9 year wait. A higher Fed Funds raises the OIS spread therefore against a market crash or severe correction, Fed Funds in the longer view is well protected from zero.

Market price volatility is held hostage by the Fed and its small ranges to control over Fed Funds. From 2008, brought Fed tools and replaced the Fed’s traditional obligation to add and subtract weekly money to the financial system. Floating weekly money supplies and floating Fed Funds dictated a market price and volatility but Fed tools, Repo Rates and QE reversed market volatility to condense prices to ranges. All central banks adopted the Fed’s approach.

January 2017 defined Inflation and the 2% target as ” the annual change in price index for Personal Consumption Expenditures”. Overall 2% is a giant number in relation to a CPI index and its many variable price components.
The new Stanley Fischer policy offered and adopted by the Fed is to view the 2% target acceptable if its within the 2% range. The new 2% is seen as a goal, not a ceiling and the range means slightly above or below 2% but not far above or far below. To far above or below means a policy response by the Fed is mandatory and a policy response is defined as an interest rate raise or drop to bring CPI back to range. Why interest rates is because Inflation percentages and Fed Funds share an opposite correlation.

The model to follow is Canada’s October 2016 renewal to its Inflation Control targets as 2% is the mid point to 1% and 3%.

Current CPI annual 2016 average was 240.0 against a low Inflation rate at 1.3%. The 2017 annual average at 2.0% must see the CPI index at roughly 244.8. Current CPI in Oct reported 246.6 and a 2017 range from January 242.8 to September’s 246.8. Current CPI is running slightly above 2.0 %.

To the credit of Keynesians, Fed Funds maintained its mid point close for a vast majority of days from 2016 to 2017. Normally 2 to 3 days per month sees Fed Funds close far below  but this daily pattern changed as repo traders maintained the 25 point channel. Only 3 times in the past 78 trading days has Fed Funds closed at 1.06 and 1.07. The questionable days are now month and quarter end.

What the Fed created was the 25 point channel rather than the current $2.3 trillion daily trade in repo markets. Repo market daily trade volumes  in 2015 went from $2.2 trillion and 48% Treasury and Mortgage securities as collateral to $2.3 trillion and 54% Treasury and mortgage securities as collateral. Despite lofty numbers, volumes are down significantly from the $4.8 trillion 2008 peaks. The increase in Treasury and Mortgage lend / collateral is derived from new SEC rules to Money market funds.

Under the 25 point channel, monetary policy is measured a success as 2016 and 2017 was a steady time without alarm bells on the horizon. Monetary Policy is expected to see more of the same in all 2018.

Despite Fed criticism, Yellen’s road was quite a balancing act. How Yellen will be viewed overall is more interesting. One view is Yellen is a transition chairperson as she steered the US back to economic health. She then paved the way for Powell to continue unabated. Then the question to policy and timing. Is Yellen policies correct and in relation to time or not correct policies as in to little to late. Fed policy affects world economies as the copycat syndrome dominates.  Good question is the left / right divide to economic policies. The jury is still out.

 

Brian Twomey

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