The Fed’s Overshoot

March 25th, 2018|FOMC|

One of my former colleagues at JPM was a rocket scientist – literally.  We once discussed how for some corrective system models, you can have a situation where you overshoot before eventually settling to the equilibrium.  That conversation was what I thought about when I saw the Fed’s dots last week. The way the Fed models tend to work is that there is a bit of an overshoot on rates, because Fed policy generally takes a number of months to take effect.  So if the Fed had the foresight of a bat, they would keep hiking as they saw inflation [...]

Fed Meeting Thoughts

March 18th, 2018|FOMC|

There are so many wacky things going on with Eurodollar futures, from libor blowing out to Kong buying EDZ8-Z9 in unprecedented sizes, that it’s hard to get a good handle on what is going on with short end interest rates just from looking at the EDs.  I haven’t seen the ED curve this messed up since the Libor crisis a decade ago.  But this time around, the economy is perfectly fine!  EDs are insane!!! Fortunately, we have Fed Funds, which gives us a cleaner look.  But even that has a little noise in it from the markets pricing in a [...]

Fed Hikes

January 7th, 2018|FOMC|

For the New Year, let’s go back to the basics and see what the markets are pricing in for the FOMC in 2018.  The most common refrain I hear is “three hikes in 2018.”  I can see that.  There appears to be more “smoothing” on the Fed Fund meeting curve than I remember.  What are the odds that the March, June, Sept and Dec Fed meetings all fall on a straight line?  I’m not sure the meetings should be this orderly in a potentially volatile year.  I mentioned last week how straight the one year fly curve was last week.  [...]

Three Fresh Prespectives on the FOMC

December 10th, 2017|FOMC|

The US Federal Reserve is expected to raise their policy interest rate 25 basis points this week.  The Fed will also increase the pace of its balance sheet reinvestment tapering, by increasing the unreinvested amount from $10 billion to $20 billion.  We also get a new set of dot plots, which could show a change of direction in Fed policy, but will most likely remain the same.  Despite all the potential activity that is going on, most analysts would consider this a relatively “ho-hum” meeting.  The markets agree, based on the declining interest rate volatility.  Amid this complacency, I thought [...]

Fed Pricing 171105

November 5th, 2017|FOMC|

There seems to be two large flows going on right now in the front of the curve.  I had previously mentioned our EDZ8-Z9 friend, who appears to be on the wrong side of EDZ8-Z0 flattening.   But the other development showing up on the radar is a large short in EDM8.  In the past two weeks, EDM8 OI has increased 56K, while the rest of the whites decreased 205K.  From the curve move, we can see that EDM8 position was a short.  The EDZ7-M8-Z8 fly increased 4.5bps in the past week.  That is a little strange when the Fed has signaled [...]

Fed Dot Surprises

September 24th, 2017|FOMC|

I know the markets have been ignoring the Fed’s dots for some time now.  But as I always say, as the meetings get nearer, the Fed dots get more accurate.  For example, the day before a meeting, if you were to do this exercise and 12 of 16 members wanted a hike… they will be hiking.  I wanted to point out some of the more interesting features from the dots. The Core summary. I typically like taking out the high 6 and low 2 dots - just to weed out the riff-raff and see what the center of the group [...]

The Tapering Fed Meeting

September 17th, 2017|FOMC|

One of the things about the “gradual and communicative” Fed is that they pretty much tell us most of the important things we need to know well in advance.  No one said anything about a hike (even the hawks) so the odds of a hike at the September meeting is basically “zero.”  They have also communicated for the past two meetings that tapering is coming, so the odds of the Fed not announcing the taper at this next meeting is also basically “zero.”  I suppose there could be some question about when tapering would start.  My “pick a date out [...]

Dovish Central Banks

July 23rd, 2017|FOMC|

Last week, the BOJ and ECB leaned dovish.  The Fed next week will probably complete the trifecta of Central Bankers leaning dovish.  What else can be expected when there are few signs of inflation?  And the growth data has not been great in the US, except for maybe employment.  The prospect of fiscal stimulus could have been a bonus, but that is looking less likely in the near future. I had suggested previously that Yellen was a "scientist" and that she would start to question a rise in inflation after an extended time with no empirical evidence of a raise.  [...]

Timing of Pricing in Hikes

May 8th, 2017|FOMC|

I thought it was interesting that the June meeting was about 80% priced with over 5 weeks to go.  I think the Fed is hiking in June as much as the next guy.  But that’s a lot of time to go – we could get unfavorable news, or the data could turn south, or we could get some market instability, etc.  Since a number of the previous hikes were “well telegraphed”, I wanted to see when the markets priced in the “likely” hike. The chart on above shows the number of weekdays until the respective FOMC meetings (x axis) and [...]

Dudley More

April 2nd, 2017|FOMC|

Dudley is the guy who said last year something to the effect that the Fed’s projections have an extremely wide standard error, and that people would be surprised at how wide it is.  Speaking of which, we should be getting the error bands around the SEPs at the June meeting.  So it’s interesting that he was as specific as he was in his interview, considering we are data-dependent.  I found a lot of interesting nuggets from his short interview: He is still a dove. He said “The consensus among many people is that the neutral FF rate adjusted for inflation [...]