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Hilsenrath's FOMC Preview: "No More Promises, Fed Is Injecting Uncertainty Back Into The Market"

There have been countless previews of the FOMC statement at 2pm today, all of them largely worthless and regurgitating the same exact stuff. The only one that matters, as it is the only one with the explicit blessing of the Fed (see "On The New York Fed's Editorial Influence Over The WSJ") in its attempt to manage expectations: that "drafted" by Jon Hilsenrath. And if what the WSJ economist writes in "Fed to Markets: No More Promises" is accurate, then fasten your seat belts, ladies and gentlemen, because we are about to enter some turbulence.

From Hilsenrath:

The Federal Reserve is about to inject uncertainty back into financial markets after spending years trying to calm investors’ nerves with explicit assurances that interest rates would remain low.


Ahead of their policy meeting that ends Wednesday, Fed officials have signaled they want to drop the latest iteration in a succession of low-rate promises—a line in their policy statement pledging to be “patient” before deciding to raise rates.


The move could be a test for investors. In theory, less-clear-cut interest-rate guidance from the Fed should lead to more volatility in financial markets. That’s because investors will be left less certain about a key variable in every asset-valuation model: the cost of funds.

Funds will "cost"? Unpossible. Clearly this will destroy the Fed's Dow Jones-Data dependent mandate to push forward PEs to 20x to keep inflation at 2% while it reads manipulated payroll data that waiters and bartenders have never had it this good, and believing that the economy is firing on all 9 out of 6 seasonally adjusted cylinders.

Here is a history of all the Fed's failed attempts to show it is now a plaything of a market with the emotional capacity of a 2 year old:

The IMF joins the warning that now may be a good time to buy VIX calls:

Christine Lagarde, managing director of the International Monetary Fund, warned Tuesday that markets could be heading for a repeat of the 2013 “taper tantrum,” in which stocks fell and interest rates rose around the world as the Fed considered winding down its “quantitative easing” bond-buying program.


“I am afraid this may not be a one-off episode,” she said of 2013 in a speech at India’s central bank. “The timing of interest-rate liftoff and the pace of subsequent rate increase can still surprise markets.”

Here the WSJ contemplates yet another indicator which central planning has rendered utterly useless: the VIX.

Right now measures of market volatility are sending divergent signals. Stock-market volatility is relatively subdued.


The Chicago Board Option Exchange’s stock volatility index, for example, has averaged 17 this year, above last year’s 14 but below its average of 21 between 2009 and 2014. The higher the measure, known as the VIX, the more volatility.


At the same time, however, measures of short-term interest rate and currency volatility have picked up, a potential warning sign of tumult to come. Merrill Lynch’s MOVE index, which tracks expected interest-rate volatility, has risen to levels seen in 2013, when the taper tantrum started.


Torsten Slok, chief international economist at Deutsche Bank Securities, said this rate volatility portends broader turbulence. “The risk here is that when volatility goes up in rates it will be spilling over into other asset classes,” he said.


Such turmoil could affect other borrowing costs for U.S. households and businesses, such as rates on mortgages, credit cards and corporate bonds. It could also hit their stock portfolios and 401(k) saving accounts.

Wait... risk, in the market? Is that legal? Why will someone please think of the 17 year old hedge fund manager children in the Inland Empire? How can anyone make money with 0% chance of loss if there is something called "risk" in the market. Surely that is unacceptable.

And indeed it is, as any market tantrum will promptly push the Fed back to its accommodative ways, as Hilsenrath also seems to acknowledge:

Even when officials have in the past tried to move away from telegraphing their actions, they have found themselves drawn back to behaving in highly predictable ways.


In winding down the bond-buying program known as quantitative easing in 2014, for example, the Fed said the pace of its actions would depend on the performance of the economy. Economic output varied sharply in 2014—contracting in the first quarter and then expanding at an annual rate near 5% in the middle of the year—but the Fed reduced its monthly bond purchases in steady increments.

The box the Fed is in "almost" explains why former Fed governor Jeremy Stein, who saw the writing on the wall, got the hell out of Dodge when he had the chance:

Jeremy Stein, a Harvard University economics professor and former Fed governor, sees a conundrum brewing for officials. Even if the central bank says its actions will be less predictable, the market will infer a rate path from its actions. To avoid unsettling markets, he said, Fed officials have an incentive to stick to the path investors infer.


“It is a hard thing to manage. You almost have to psyche yourself up to not worry too much about spooking the bond market,” he said.

It almost makes one wonder when reflating and preserving asset bubbles became the Fed's only mandate...