No “Yellen Put?” You Gotta be Kidding…

“I do not believe it’s the Fed’s job to rescue reckless investors from the errors of their ways.” Now they tell us!

Some stock-hype artists said that the Fed can’t actually stop QE, ever, or that it would restart it at the first squiggle in the markets. They were almost right.

On October 15, when stocks were going to heck in a straight line, St. Louis Fed President James Bullard got on Bloomberg TV and pressed the red panic button. The profusely sweating souls on Wall Street had been clamoring for it. Markets could not be allowed to skid more than a couple of percentage points. Dip-buying had to be instantly rewarded. And they’d hold the Fed directly responsible if it didn’t get this mess straightened out pronto.

So Bullard said on TV that the end of QE should be delayed and that the Fed should continue buying $15 billion in securities a month. With that, he’d handed those profusely sweating souls what they’d been clamoring for. Or they thought he did. It was enough. Stocks instantly turned around and started re-soaring. The “Yellen Put” was born. It would kick in before stocks reached the 10% correction mark. Or so they dreamed. But Bullard was just jawboning the markets back from the brink.

It wasn’t what the Fed has been saying.

QE is buried. The only question that remains is ZIRP. It increasingly looks like Yellen wasn’t kidding when she warned lawmakers in July that, given a few ifs, interest rate hikes “likely would occur sooner and be more rapid than currently envisioned.”

This has been confirmed by other Fed governors, including Dallas Fed President Richard Fisher. In early August, after being asked why as a hawk he hadn’t dissented, he pointed out that the committee “is coming in my direction…. I feel comfortable with where the committee is going.” And the committee was getting more hawkish.

Now the doves are reduced to dissenting.

So on Monday, in his remarks before the Shadow Open Market Committee, Fisher was holding forth on QE’s rise and fall, now that the Fed balance sheet has ballooned to $4.5 trillion from $900 billion before it all started. So QE “seemed to succeed” in pushing down interest rates, goosing credit markets, and whipping stock markets into froth. “This came, of course, at the expense of savers,” he said. “But this was a cost that the committee felt was exceeded by the expected wealth effect.” Or more precisely:

For those with access to capital, it was a gift of free money to speculate with. (One wag – I believe it was me – quipped that there was, indeed, a “positive wealth effect… the wealthy were affected most positively.”)

But the effectiveness of QE3 had waned even as “current and potential future costs were mounting.” So he was “an enthusiastic supporter of killing” it. It hadn’t been used for productive purposes but for financial engineering “primarily to finance stock buybacks, increase dividends, and fatten cash reserves, and recently, finance mergers by the most creditworthy companies.”

The result is “an indiscriminate reach for yield, a revival of covenant-free lending, and an explosion of collateralized loan obligations (CLOs), pathologies that have proved harbingers of eventual financial turbulence.” Junk bonds were trading at historic lows. Risks that have been “propagated by QE3.” And then he added the ominous words:

“I do not believe it is the Fed’s job to rescue reckless investors from the errors of their ways.”

The Fed should, “in most circumstances, not directly concern itself with fluctuations in financial-asset prices,” he said. A “hearty” economy “can withstand reversions to the mean of junk bond or any other trading market and stock market corrections.” It did so before and can do it again.

For this reason, as we approached our deliberations at last week’s FOMC, I saw no reason for the Fed to react to the heightened volatility that occurred in mid-October and strongly advised my colleagues that we should be wary of any action we might take at the FOMC that would lead investors to assume there is a “Yellen Put” hidden in our pocket. For this would only encourage continued indiscriminate investing.

What, no “Yellen Put?”

Now you tell us!

The committee, as he’d already suggested in August, was moving in his direction: upon his insistence, the word “significant” was dropped from the description of the remaining labor-market slack; and language was added to show that the FOMC might raise rates “sooner than thus far assumed,” echoing Yellen’s words in July. These two “neutered,” as he said, the adjective “considerable” that was left in place to describe the time before rates would be raised.

And his insider take on Yellen? She’d wrongly been “pigeonholed as a dove,” he said. Instead, as chair of the FOMC has proven herself to be “neither dove nor hawk,” but “impressively balanced.”

This seems to be the new Fed: QE is buried; doves are reduced to dissenting; Yellen is itching to raise rates; hawks like Fisher are getting their policy objectives inked into the statement; and now even Wall Street’s sacrosanct assumption of a “Yellen Put” has been pooh-poohed by the Fed itself. Though that won’t preclude a Fed governor or two from trying to jawbone markets away from the brink – which may not always be as successful as Bullard’s effort was.

The bitter irony is that, after pushing desperate investors, from retirees to fund managers, way out toward the thin end of the risk limb, the Fed will just abandon them. It will be up to them to figure out how to hang on by their fingernails, or fall off.

The impact of the Fed’s policies since the financial crisis is now clear: for individual Americans, economic “growth” has meant the opposite. Read… That Shrinking Slice of a Barely Growing Pie: Why the Glorious Economy of Ours Feels so Crummy

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  15 comments for “No “Yellen Put?” You Gotta be Kidding…

  1. mick says:

    Can i really believe the FED will be the thing to kill this abomination called a market?
    Maybe, but I’d much rather watch it blow up in their faces in the midst of their desperate contortions and engineering.

  2. Kathy says:

    Well, it’s surprising to see FED policy under Yellen. But I will wait until they actually increase rates.

    • Archy Don says:

      I will wait until I think they have a clue what they’re doing, but don’t expect to live long enough to ever see that day.

  3. Mark B. Spiegel says:

    I hope you’re right. Unfortunately though, I remember back in early 2012 when Fisher called the possibility of QE3 “a Wall Street fantasy.” (You can Google the quote and easily find it.) Back then Bernanke considered him to be the court jester; let’s see if Yellen is any smarter.

    • Archy Don says:

      Yellen, smarter? Smarter than what. Your average kumquat?

    • Wolf Richter says:

      Fisher IS the court jester. He is hilarious. And like other hawks, he was steamrollered after the financial crisis. The msm practically ridiculed these hawks.

      But I’ve seen a decided change. And Yellen has been part if it. I started writing about it a few months ago because it surprised me. I didn’t expect that from her. I think there is now serious momentum to “normalize” monetary policy. I think they want to raise rates enough to where they can lower them when the next recession hits. And they don’t ever want to get back into QE.

      That’s my impression. Who knows….

      And they don’t want this ongoing financial speculation to blow up the system again. I think they’re actually afraid of it.

      • dc.sunsets says:

        QE was always an act of desperation.

        The issue was one of perception; in the past, the FOMC’s use of QE was seen as constructive (we know better, yes, but….)

        If the FOMC pulls QE out of the bag again, they face a much higher risk that perception this time would reflect reality: Desperation (captial D, that is.)

        The world’s debt-fueled, debt-saturated economies are held together by a consensus that never once made sense, but mass psychology rules. FOMC members may be blinded by hubris, but one has to wonder if they are all that delusional.

        A breakdown of the mass belief sustaining all this could come from any point on the compass, but how delicious would it be if the source to which everyone later points is the FOMC itself.

  4. Mike Rains says:

    Even though QE has been stopped (almost), that doesn’t mean there isn’t some serious level of support behind the scenes for the stock market in particular. I believe that continues to go on as well as the sacking of gold and silver. What TPTB can’t do though is keep the markets propped if there is massive selling. Right now, volume is extremely low but this fact is somewhat obscured by the continuation of high frequency trading (which by the way is why they won’t stop the practice as it covers up the reality of dismal market participation).
    As far as raising interest rates, that is all talk to make us think that things are returning to normal. Will never happen. The economy is slowly losing steam and by 2015 2nd quarter will be noticeably weaker; particularly as this Fed-induce building mini-boom winds down.

    • Archy Don says:

      Mr. Rains, sir. Thank you.

      “The economy is slowly losing steam and by 2015 2nd quarter will be noticeably weaker; particularly as this Fed-induce building mini-boom winds down.”

      (The mini boom is underway in Texas and the houses are selling with escapees from the big blue northern states coming here for what they can’t find in blue – work.)

    • dc.sunsets says:

      When rates rise, it seems most likely that they will do so because of failing confidence in the trustworthiness of either the monetary unit (if the FOMC keeps debasing it like mad) or the underlying health of the issuer(s) of the debt instruments.

      Rates fell as people flooded “safe” debt, desperate for return on their money.
      Rates may rise as people begin to panic, desperate for return OF their money.

      That’s a rate environment the FOMC is highly unlikely to be able to control. They are Wizards of Oz, not of reality.

  5. Vespa P200E says:

    The market is drunken with QE and near zero % interest rate, and the recent race back to the top is sign that it believes there will be no rate hike in 2015 and some kind of continued cloak QE as after all QE3 lasted 2 yrs.

    Helicopter Benny got all the “credit” as shepherd of TBTF banksters to record bonus payouts and of course he bowed out right before the excrements hits the fan. Well Janet dearly wanted the job and she will be blamed once the markets sobers up from reality of CBs of the world QEs gone amok.

  6. Ray says:

    Seems to me like the bank of Japan will fill in the gap between QE3 & 4.

    • dc.sunsets says:

      At the rate they’re going, the BOJ and Abe government are going to have to reprogram all the financial and accounting software to handle 15 zeroes left of the decimal instead of their current 12.

      By that time, one has to wonder if there are enough electrons in the Electric Universe to “paper” the inside of all those cloud servers with all that yen.

  7. The Fed cannot cut interest (policy) rates from zero. There has to be a rise in rates before the they can rush in like the White Knight and rescue market-pressed speculators and gamblers.

    Interest rate traders will make money coming and going, so will Forex traders. Sitting @ zero for years doesn’t make anyone any money, not even the banks. They are reduced to playing minuscule spreads and that can be risky. Plus a bear market is a good buying opportunity for those with access to credit. Someone will always have access to credit … right?

    Two problems with higher rates: how to get there without blowing up the bond markets? How will the US government meet its interest costs? The Fed would have to sell Trillion$ in bonds to push up policy rate a mere 1.5%. At the same time, interest charges on govt borrowings are now minuscule as current real rate = negative.

  8. Julian the Apostate says:

    You all remind me of the 19th century physicists who believed in the ether, until a clerk in the Swiss patent office said “hey guys, what if the speed of light is a constant?” I firmly believe that they are afraid. What parasite wouldn’t be if their host was dying and there wasn’t another to latch onto? What makes you think their goal is LIFE?

Comments are closed.