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Thursday September 2, 2010 - 01:43:49 GMT
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Fed Drama Ramps Up (FXA)

Fed Drama Ramps Up


A day rarely passes when a Fed official is not out spilling his or her guts on what should be done about the economy and monetary policy in unusually unvarnished language.  Today’s drama queen was none other than Dallas Fed President Fisher who declared the Fed’s job done and called on Congress to get fiscal policy in order so that the economy can grow.  It is especially rare to have a Fed official be so outspoken about fiscal policy.  There is no longer an separation of church and state…criticizing Congress is now even fair game for Fed officials based on what Fisher and others are spouting to any and all that will listen. 


Indeed Fisher seems to have lost any semblance of Fed decorum stating “We print money.  They (Congress) figure out who to take it from and where to spend it.  And that’s their job.”    A Fed official bashing Congress?  Unheard of yes and heck Fisher (Richard that is) is about as cheap and vulgar as one making fun of another drama queen named Fisher – Amy Fisher, the Long Island Lolita, who shot Mary Jo Buttafuoco in the face so she could have her husband Joey Buttafuoco all to herself.


However, I would normally blow off remarks from a regional Fed President like Fisher if not for the fact that Bernanke at Jackson Hole said much the same think, if in a more dignified fashion. 


Despite the Fed departure in protocol there must be a reason for the rise in drama…Washington must be hard at work, behind the scenes pressuring the Fed to do more…sound familiar?  Why this is what drove the BOJ to announce it was enlarging its credit facility in an emergency meeting on Monday.  The US mid-term election is in November and the majority party in power is about to have its butt kicked unless it can change public perceptions about the recovery.  While not even jaded Washington Congressional members facing re-election believe monetary policy, if relaxed enough can create jobs in a matter of months.  No this pressure assuming it is real would be aimed at Fed easing sending asset prices higher (stocks and real estate), the necessary but not sufficient condition for the general public feeling better about the economy (what worked so well in 2H 2009).  Perhaps Summers and Geithner are visiting and calling more to “share” ideas.  Maybe Pelosi and Reid are ringing into Fed officials.  Whomever or whatever it is I sense the Fed is downright defensive.  It looks like the second half of the turf war with the first battle over the Fed maintaining regulatory authority over the banks and now the battle is fighting off coercive politicians.  Okay maybe some of the drama is justified given the stakes involved – an independent Fed. 


While we know there is plenty of internal drama within the FOMC as views on policy differ among committee members (or on an even petty scale when Hoenig did not invite NY Fed markets head Brian Sack to Jackson Hole – arguably the third most important Fed official since QE started as he has loads of input into decisions over what and how much assets to buy to enlarge the balance sheet), the growing sign of drama between the Fed and Washington is slightly more alarming.  It is one thing if the economy falls into a Japan decade of stagnation, however it is something all together worse if the Fed becomes an appendage of Congress as arguably the BOJ is (at worst economic times) to the Japanese government.


I see two risks present for the Fed…the one risk, albeit smaller, is that Fed drama (internally or with Congress) becomes a source of volatility in asset prices and FX and the other risk, much greater threat, is if Congress finds a way to get the Fed to do more before the Fed is ready to do more.


Bernanke may well have signaled Friday that he is not going to make policy on a political time clock or under White House and or Congressional duress all of which tells me that QE2 will be delayed until the economic conditions clearly warrant a bigger response.  Unfortunately, the effort to fight off efforts at political coercion may mean the policy response comes too late to have the desired effect, and then requires a much larger response than would be the case if politicians refrained from attempting to influence the process. 


ISM What?


You have to be kidding…China ISM (the official one plus the HSBC China ISM) and then US ISM and markets race across the deck of the ship…such a low (data) bar for such a big move.  Why?  Okay positions were extreme and the curve flattening has been significant in the last few weeks.  The market was vulnerable for sure.  But even strong ISM should not see such a major realignment in positions especially ahead of a key jobs report that followed a dreadful number earlier today from ADP on private payrolls.  My default narrative is to blame the algo models…today was a flash crash for Treasuries.  You need to be locked up if you think risk on trade is back for good and furthermore that the lows in Tsy yields are in place.  Even without deflation, a lengthy period of below potential growth is not the backdrop for being long risk like equities…think Nikkei.  Just maybe a very weak jobs report Friday sees the algo models run near infinite bids into Tsys and out of equities reversing today’s move.  At least that one I could live with…jobs vs ISM.  In any case the market vol and lack of liquidity is enough to make a discretionary macro trader sing “Video Killed the Radio Star.”


David Gilmore     



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