If one needs to observe ample confusion by a central planner, one usually needs to look no further than St. Louis Fed's James Bullard, the same "hawk" who has been pressing for aggressive rate hiking throughout the last year except when the market almost entered a correction and he promptly hinted at QE4.
There was more of the same earlier today, when he spoke earlier at the annual Hyman P Minsky Conference, and said “now may be a good time to begin normalising US monetary policy so that it is set appropriately for an improving economy over the next two years. Even with some normalisation, monetary policy will remain exceptionally accommodative.”
Correctly, he further noted that “a risk of remaining at the zero lower bound too long is that a significant asset-market bubble will develop."
He added that the Fed is concocting a "witch’s brew" of factors that could lead to excessive risk taking if it holds interest rates near zero for too long as the jobless rate approaches normal. "My story about bubbles is most of the risk lies ahead of us. That’s a witch’s brew of factors that sounds like a bubble."
Graphic description of the Fed's chemsitry experiment gone bad to paraphrase David Einhorn, what Bullard unfortunately doesn't get is that asset bubble is already here and now and manifests itself in the form of the biggest ever Treasury bond bubble, which is merely the entire market frontrunning the world's central banks monetizing a record amount of debt, and logically, in risk assets as well due to the infamous "There Is No Alternative."
So far so good. It was at this point where Bullard's comments veered off into the bizarre and outright contradictory, because he said that the:
- FED SHOULD NOT SURPRISE MARKETS ON TIGHTENING PACE
... minutes after he said:
- NOW `MAY BE A GOOD TIME' TO BEGIN RAISING RATES
And then added:
- HE'S `DELIBERATELY VAGUE' ABOUT LIFTOFF TIMING
But... he just said....
So which is it? Or do the market expect a rate hike now according to Bullard, and as a result the S&P is back to all time highs?
The answer is simple, and one which Bill Dudley already hinted at last week - the Fed is now market data dependent, and if and when even the smallest selling starts, the Fed crawls back into its shell: "if we did something that surprised one way or another and markets had to reconcile those prices all at once."... “I think that’s an important issue for trust in the market."
We wonder if Bullard realizes the Fed is the market. Probably not.
But the absolute punchline:
- BULLARD: CUT RATES IF ECONOMY SUFFERS SHOCK AFTER FED LIFTOFF
In other words, the only reason the Fed is hiking rates is so it can cut them right after, and if possible launch another full blown QE just to keep markets from being too "surprised"...