Wednesday, December 18, 2013


OK, I got it wrong, the Fed tapered.  Starting in January, $5 billion comes off the amount of bond purchases…whoope-damn-do.  Forward guidance remains extremely dovish with the discount rate targeted to remain at between 0.00%-0.25% for all of 2014.  Now what "forward guidance" does is beyond me, as the factors that enter into the creation of such a beast can change in an instant but all in all it was the nicest of Christmas presents to the stock market as the DOW closed up some 297 points.  Free money forever!

The more interesting question is if you're talking about $5 billion out of $80 billion a month, whatsupwiththat especially since it was revealed that the vote to taper was 9-1.  So I ask, 9-1 for WHAT and with what conditions attached?  I bet the answer is that this compromise having more to do with the future make-up of the Board than good, solid, central bank economics.

There are a couple of open seats.  Lael Brainard, late of the Treasury, gets the international seat.  Ms. Brainard is frightfully bright and well-educated and loathed--wait, that's a strong word--let's say intensely disliked by almost all who know her.  She is a pure political animal of the "Yes sir, yes sir, three bags full sir" variety.  Owned and operated by White House Inc.  She also, it was reported, made it very clear that the Vice Chairmanship was to be hers.  As my cousin Guido, now retired from the family business might have said, "This broad got some stones."  Guido was never an anthropological wiz.  Enter Stanley Fisher.

Mr. Fisher, in regard to the QEs has publicly been in the camp of "It can't hurt but it doesn't do much either."  Nothing new there.  But Stanley Fisher as the Vice Chair expressing such views is a whole different kettle of fish.  Now there isn't anyone on that Board without a pretty fair sized ego, but a disagreement with Stan Fisher, no matter how small is not a winning strategy.  Stan has also been around long enough to realize that conditions change very rapidly and I wouldn't be the least bit surprised if his views in regard to future guidance are similar to mine.  I was in the room where in a discussion of the financial condition of the Republic of Colombia late in the last century, we were reminded by my good friend--let's call him Bobby C.--that the country's financial condition could flip overnight depending upon the disposition of the latest container load.  I doubt if anyone in that room has forgotten that little excerpt from Life Lessons Learned.

So what we have I think is a compromise looking to the new disposition of the Board; one which puts off possibly contentious issue for some point down the road.  It was also made fairly clear by the Chairman in his remarks today that we should stop looking at things like the employment rate or the job rate as triggers for a change in Fed policy.  However, the inflation rate, which remains below 2.00% is highly important to this Board (N.B. to readership:  do these guys ever shop).  In short, I don't think much of anything happened today other than the table being set for the next round of players.  Of course, everybody got a wee bit suckered.  The Fed figured out that the tapering of the  bond buying spree, whilst it had little effect during it's existence, was scaring the hell out of the markets and therefore the announcement of the continuation of the Money for Everybody posture was necessary.  Bingo.  Got it right.  Now everyone is focused on interest rates.  We understand those, right?  But here's one thing:  the 10 year hardly moved.  Why?  I haven't a clue, but it has been my experience that if you want to know what's happening, watch the bond market.  I guess nothing happened.

And as for Stanley Fisher.  I'm pretty sure the fix was in somewhere with someone.  From the standpoint of someone like me looking for reasons why Mr. Fisher would want or need this job much less take it it looks like madness, yet as some guy I once knew said, yet there's method in it.  We will probably never know the goings-on that brought this rather remarkable event to fruition, but I'm convinced--based on a whole bunch of conversations and pure supposition on my part--that Stan didn't ask for this job but was convinced to accept it.  The wags in D.C. are saying The Leader is delighted; I think The Leader got bagged and we know The Leader does not talk to Republicans.  Then again, I'm delighted which of course is what really counts.

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