The Fed has two weapons at its disposal in setting monetary policy and controlling asset markets. The first is jaw boning and the second is actual action like raising or lowering rates etc. In one of Ben Bernanke’s blogs he cheerfully admits that 90% of what the Fed wants to get accomplished occurs through jaw boning the markets. Well I guess the Fed decided to halt the slide of the markets today and they trotted out “The Bullard”, as the traders like to call him. You may recall that Bullard made an appearance in October 2014, as the market was cratering, and put QE back on the table. The Market bottomed that day and a V shaped rally ensued for 6 weeks. Today Bullard came out and walked back the rate hike talk using the low price of oil and lack of inflation as the excuse.
What is extremely important is to realize that if this rally fails in a few days or a week and we roll over then the Fed has lost a very important tool in their tool box and that is jaw boning. In 2008 Bernanke lost that tool and then he had to resort to rate cuts as the markets imploded and eventually those didn’t even work either. Basically if we go to a new low this will be the first sign that the Fed has officially lost control and then it will likely become apparent to many market participants that the train has left the station and stopping the train will require extra ordinary measures. The problem banking on these measures is that they are likely to occur from much lower stock prices and will be tough for the Fed to do in an election year. This next rally is extremely important and will be a tell for us as to whether or not the Fed still has the confidence and control that so many of you have come to expect. My bet is no they don’t and that much lower stock prices are already baked into this deflationary cake. If we don’t V and go to new highs very soon then look out below.
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A guy with “Bull” in his name is trotted out to refresh the bull market. Too perfect.
Superb financial bloggery, tip of the hat.
Jawboning has got to have a diminishing return effect after market reacts to Fed being blatantly ignorant to what’s going on these past 8 months.
They’ve essentially “jawboned” the Trsy curve dead flat this whole time and now they’re admitting to being wrong about inflation’s ‘transitory’ path (deflation?)
What do CB’s do to fix deflation if it hits your economy?
Blue, You forgot in your analysis the ECB and BoJ both meeting this month. BoJ is doing the same song and dance over the drop in Oil effecting all their future CPI numbers. Draghi yesterday came out and said he doubted that the members that didn’t support the Dec QE spike, changed their minds. Jaw Boning around the world at the moment. We saw this Bubble form since 2009, I still can’t believe how long it took to pop. Central Bankers truly made a mess of global markets.
Thanks for for helping me understand what are the most simple and
powerful tools the feds have.I get caught up watching the big waves when It’s
the direction of the wind I should be paying attention to.
If this was strategic, why would they have Bullard jawbone one way, and then have Dudley come out and say something different the very next day. Do they not coordinate their speeches? I just don’t get it.
DJPS,
Fed speak is very subtle and on the margin. I have not read that speech. Another member came out and put negative interest rates on the table today. So evidence favors they are Jaw Boning.
This is painfully slow week -.-