Three months ago, in the aftermath of the Fed’s March rate hike we reported on what we thought at the time was a shocking development: instead of tightening, financial conditions eased. Dramatically. So much so, in fact, that Goldman chief economist Jan Hatzius wrote about it, saying that the “the Fed’s 0.25% rate hike had the same effect as a 0.25% race cut!” and adding that “this was not the reaction the Fed wanted.”
In short, Hatzius said that the Fed appeared to have lost control of the market.
Two months later, as financial conditions continued to get looser, Goldman doubled down, and asked – again – if Yellen has lost control of the market, and warned that only a “policy shock” may be left to normalize the market’s “reaction function”to what the Fed was saying… and doing.
Now, moments ago, St. Louis Fed President James Bullard effectively confirmed that Goldman was right, and admitted that the may have indeed lost control of the market when he said that:
FED’S BULLARD SAYS FINANCIAL MARKET REACTION TO MARCH TIGHTENING HAS NOT BEEN GOOD, WOULD HAVE EXPECTED YIELDS TO RISE WITH POLICY RATE
* * *
The yield curve has collapsed since The Fed started hiking rates…
And as Bullard spoke the markets started to break down…
With VIX up nearly 4 points today.
But don’t worry: should things go south fast, Bullard has a solution for that too:
- FED’S BULLARD SAYS NEED TO CREATE POLICY SPACE IN GOOD TIMES IN CASE NEED MORE QE IN FUTURE
Translation: time to start trading on QE4