Monday, August 29, 2016

Fed Chair Yellen's Speech Recap: Don't Worry, The Fed Will Cause The Next Recession Too

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*The Fed admits they caused many recessions.
*Fed Chair Yellen's plan in a recession calls for more QE, which she admits they don't know much about or the consequences.
*Raising short-term rates and not letting go of long-term assets (QE) will drive yield curve inversion and a recession.
*That's their next move, as they've stated.

In reviewing Fed Chair Yellen's speech on Friday and a Fed research paperprinted recently that she refers to, it appears the next recession will need more QE (Quantitative Easing). That said, she admits that they know very little about the consequences. The Fed states their plan to raise rates before they let the QE roll off. If they do that, rates will invert by the Fed's own doing. That likely sours business confidence further and sends us into the next recession.
Let's see what the Fed Chair said on Friday and let's analyze it:
The FOMC considered removing accommodation by first reducing our asset holdings (QE) (including through asset sales) and raising the federal funds rate only after our balance sheet had contracted substantially. But we decided against this approach because our ability to predict the effects of changes in the balance sheet on the economy is less than that associated with changes in the federal funds rate. Excessive inflationary pressures could arise if assets were sold too slowly. Conversely financial markets and the economy could potentially be destabilized if assets were sold too aggressively.... Given the uncertainty and potential costs associated with large-scale asset sales, the FOMC instead decided to begin removing monetary policy accommodation primarily by adjusting short term interest rates rather than by actively managing its asset holdings."
The strategy of buying $4T in assets has consequences they didn't know at the time and still don't know.
Does that bother anybody?
First, keep in mind they are making this decision to raise rates before selling assets simply because they don't know the effects of selling assets. That's not a good reason. They should make their choices because they know it works better not because they don't know it doesn't work.
Second, we think they do know. They said it. It will "destabilize" financial markets (NYSEARCA:SPY). It will send markets spinning lower. They might not have thought about that initially, but now selling those assets bought in QE creates a risk and ties their hands.

Chaim Siegel has been working with hedge funds and mutual funds as an analyst and PM his entire career. Chaim specializes in earnings and predicts, analyzes and reacts to earnings and earnings events as well as developing current company stories with a hedge fund perspective. If you want his analysis real time sign up to the right for real time email alerts. #in, $spy, $qqq, $iwm, $vxx, $ycs, $fxe, $EUO, $YCS, ^GSPC, INDEXSP:.INX, #elazaradvisorsllc, CME Globex: ES Disclosure: These trades can lose you money and principal especially when using leverage BY USING THIS SITE YOU AGREE TO TAKE ALL RESPONSIBILITY FOR YOUR OUTCOMES AND LOSSES AND HOLD BESTIDEAS, ITS CONTRIBUTORS AND ELAZAR ADVISORS, LLC HARMLESS