The market response is meh

US and European stock gauges are lower after a mixed Asian session as investors give a cautious response to the Federal Reserve leaving interest rates at record lows.

That’s from the FT.  You do not, however, have to infer that the Fed’s recent decision to keep rates at zero, and signal ongoing dovishness, did not matter.  In part the decision also signaled a Fed belief in global weakness, and it signaled a pessimistic Fed stance on China.  Whether or not traders look to the Fed for superior knowledge, the beliefs of the Fed may be a relevant “sunspot” which traders respond to.  Here is my recent post on the paradox of no market response, very timely I would say.

That all said, I still do not see the market response as validating the view that an enormous amount was at stake with this decision.  And note the two-year rate went crazy once the press conference was underway, so the observed extent of dovishness from the Fed was truly a market surprise.

Update: Markets are now down around the world.


One can't infer anything regarding the placement of iocane powder.
See Vizzini (Wallace Shawn, Princess Bride)

what is the Straussian reading of that?

Never get involved in a land war in Asia?

I hear that's a classic blunder.

I think most Fed watchers interpreted the Fed statement + Yellen comments as hawkish, not dovish. The market was up just after the Fed statement only, but started dropping once Yellen started talking.

Talk of tightening is all kinds of crazy.

Inflation is .2p. Labor participation is still low. Commodities, China, and a stronger dollar are all going to put deflationary pressure on the economy in the coming months. Is our target rate of inflation -2p?

Given the problem is rentier capitalism and what is required to fix the economy globally is what Keynes described as
"Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital."

Just to be clear, Keynes was advocating capitalism, that, to paraphrase the Donald, "so much capitalism you would be tired of capitalism".

His reason for low interest on savings was to:

"An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.

"I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution."

Keynes argued for low interest rates to euthanize the rentier and functionless investor. But he also understood that low interest rates were insufficient to effect this euthanasia, so he called for government to promote capitalism by multiple policies.

The policy I bet he would embrace today would be a carbon tax that was intended to go over the hump of the Laffer curve within a decade and raise virtually no tax revenue it was so high. The way to dodge a carbon tax is so much capital that capital is no longer scarce and rentiers and functionless investors are erased.

How much slower can velocity go as increasing money supply gets stuck in Wall Street asset churn pump and dump?,M1V,MZMV,

And the evidence that a zero interest rate policy helps to solve these problems is…?

How about the Fed official who predicted negative interest rates in 2015 and 2016? The report looked very dovish to me overall, I am starting to believe rates will not rise until after the end of the next U.S. recession.

If Fed watchers had interpreted the statement hawkishly, 2 year notes wouldn't have rallied 13 bps.

The common wisdom was that a tightening hadn't been priced in, but with 2's at 84 cents, pre-Fed, that would have implied a 59 basis point spread to a 25 cent FF rate. That seems about right in an environment of very gradual rate hikes, thus a tightening had been pretty much priced into the short end of the Treasury curve.

What time frame are you looking at? The treasury reports the 2 year peaking at 82 bps on Wednesday, and then dropping to 69 bps by the close of Thursday.

As a trader, I'd say the response is a mixed bag - yay for more forcing of money into equities, nay for the realization that growth simply isn't there.

This whole thing is pretty retarded actually - we're talking freakin' 25 basis points. Leads me to wonder how much economic activity doesn't occur b/c the rates are too low.

Prolly a good thing I'm not in charge - I'd have the fed funds rate at 1% by now.

Tyler you're right. Fed should generate mass unemployment to drop inflation from its scalding .2% rate.

No attempts to control commodities or housing or stocks - but man, we had better be prepared to slam on the brakes if the labor market tightens.

do you consider the Fed's decisions misguided or arbitrary?

if so, what would you recommend to improve the Fed functioning in short and long term?

I'd propose that the fed watch NGDP. Which is growing well within tolerance and certainly below 5p.

They all knew this was coming. Does anybody really believe Jamie Dimon guessed that there would be no movement? I'm not proposing there was some huge conspiracy. I am saying that with that much money on the line, you're going to make every effort to know what will happen before it happens.

You can know it too. Odds of an October hike, as of today: 14%

December: 41%
January: 50%
March: 64%

Interesting. It looks like odds for a December hike rose. On net, it looks like the markets see a hawkish adjustment. Am I reading that right?

Yeah, what were the markets predicting six months ago?

A 0.25% rate hike is basically nothing. It is a nothing burger in terms of direct impact. It is major for psychological impact though. Even if the Fed didn't hike again for 2 years, it would have signaled a return to normal.

I have zero incentive to buy a home because prices are falling in my area and interest rates aren't rising. A friend in an area with rising home prices told me he's worried home prices will fall when rates go up, so he's not buying. The Fed has to hike a small amount to restore normal psychology to the market. Raise 0.25%, nothing happens short-term, but incentives change.

China's going to devalue the yuan in a big way, a surprise weekend decision, in the next 18-24 months, so this is all academic.

The only good reason to buy a home is because you want to live in one.

I see two primary possibilities here:

1.) The market largely saw no rate hike, and that info was built into prices.
2.) The rate hike isn't much of a big deal anyway.

1 and 2 aren't mutually exclusive, either.

Yellen doesn't want to encourage savings, she wants to encourage spending including on investment in productive capital. Higher interest rates would only encourage savings when there's already a glut in savings that is depressing returns on capital, investment in productive capital, and economic growth. Unless and until policy makers come to grips with a world awash in savings, we will only tread water; unless and until owners of capital choose productive investment over speculation, we will only tread water; unless and until owners of capital know risk, they will continue to fuel a financial asset bubble. By staying the course, Yellen is challenging owners of capital, challenging them to invest in something besides speculative financial assets. Easy money from speculation works until it doesn't. Viewed from this perspective, today's market reaction makes perfect sense, while the conventional wisdom, that continued low interest rates fuel a continued financial asset bubble, makes no sense. Know risk. [Of course, this doesn't address the causes of the savings glut. But even a blind man can see the causes: combine escalating inequality in developed countries with escalating inequality in developing countries (plus the explosion in global trade that mostly benefited a few in developing countries), and it's a perfect storm. What's ironic about the MR blog and one of the reasons I enjoy reading the blog is that Cowen's colleagues at Mercatus would allow asset values to fall to their actual values by allowing markets to be markets: the further they fall, the lower the inequality. That's the beauty of markets: they self-correct excesses and imbalances, including excessive inequality. I think that's nuts (allowing markets to be markets, no matter the consequences), but at least it's a plan for addressing inequality and the savings glut.]

something baseball-y that Tyler might like:

I think I gave up on interest rate rises in 2012 or so. By then the "turning Japanese" narrative, roughly speaking, had seduced me.

Now, in 2015, I think the interesting thing is how many smarter people still think interest rates will rise "because they always do."

A case of smart people artfully constructing stories to confirm less smart assumptions?

"the initial price move ... cannot itself be correct"

Is this because the market agents have the wrong model in their heads?

The Fed holding tight brought the question of weakness in the rest of the world to the forefront.

Previously few investors had paid much attention to the worldwide slowdown in growth and trade, let alone thought about it damaging US growth. Investors were still discounting a rebound of EPS growth and the Fed's actions called that into question. Investors are having to continually revise their earnings expectations down. First half earnings growth was negative -- the consensus had forecasts around 10% growth in the first half and were still forecasting similar growth in the second half. They first big hit to expectations was a few weeks ago because of the Chinese devaluation and now they are having to do it again. Remember, about half of the S&P 500 earnings come from abroad. Moreover, that foreign weakness will feed into domestic weakness, it is just a matter of how soon and how severely.

The market impact of delivery of a consensus expectation is generally "meh." I would interpret the sell-off as mainly profit-taking.

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