Diary of a Financier

Fed “tapering” early detection system: Regularly scheduled maintenance

In Idiosyncrasy on Thu 6 Jun 2013 at 12:42

{/<Run program>:Fed advanced warning checklist}

{/Commencing sequence}

  1. Unemployment- Although it’s trending in the right direction,Unemployment rate US (2013.03) March’s latest report of a 7.6% unemployment rate is still far above the Fed’s explicit 6.5% target
  2. Inflation- 5y5y TIPS forward inflation breakevens5y5y v SPX (2007-13) at 2.4665% have plummeted back below that 2.5% border, right in the sweet spot for the Fed
  3. Asset bubbles- SPX has started catching down HY credit spreads- Absolute (red), Relative (blue) & SPX-adjusted (green)to other risk assets after stubbornly diverging throughout May; Oil price technicals are signaling a turn higher, but other commodities are still lost in no-man’s-land; High Yield credit spreads have widened a bit–a blow softened by the backup in Treasury yields–and while absolute spreads are historically low, relative spreads are still 50% higher (~250 bps) than in 2007; risk asset exuberance is undeniably something to fear in the near future
  4. Bank lending- Inflation adjusted loans to the real economy C&I Loans- Nominal outstanding (blue), Real outstanding (red)(Commercial & Industrial companies) is very tepid compared to the insane spikes in Savings & Loan Crisis, Tech Bubble, and Great Recession



Takeaway: #Taper OFF #Buy the dip

Like I said:

“Growth, inflation, and unemployment have not even come close to attaining the explicit goals set by the Fed… By dropping words-of-the-day, like ‘tapering,’ the Fed both tests the marketplace’s preparedness and talks down surging asset values.”


  1. Again, like I said…

    John Hilsenrath (WSJ, 2013.06.13):
    “Fed likely to push back on market expectations of rate increase… [after tapering chatter] appears to have investors second-guessing the Fed’s broader commitment to keeping rates low. This is exactly what the Fed doesn’t want… It’s a point Chairman Ben Bernanke has sought to emphasize before. The Fed, he said in his March press conference and again at testimony to Congress last month, expects a ‘considerable’ amount of time to pass between ending the bond-buying program and raising short-term rates.”

    Also, as Bill McBride (Calculated Risk) points out:
    “A few years ago, market expectations at each point were that the Fed was going to raise rates in six months – always six months, and that incorrect expectation was one of the reasons the Fed worked to improve their communications and eventually added a statement in January 2012 about keeping rates low until at least 2014. They revised their statement again and added thresholds for raising rates. It is pretty clear the Fed Funds rate will be low for a considerable time, and market expectations appear wrong again.”


  2. […] gets deeper than that though. I just dropped a comment as an update to one of my earlier entries, which had asserted that the Fed’s tapering talk was […]

  3. […] said, I still don’t expect a tapering yet, and I still think Mr. Bernanke should exert pressure on the Treasury/Congress to […]

  4. […] Updated: Four charts to track timing for QE3 tapering | Calculated Risk Includes actual & projected data for the Fed’s tapering targets: 1. Growth (Real GDP)- 4q13 projection +2.3-2.6% vs 2.0 target 2. Unemployment- YE13 projection 7.1% vs 7.3 current, 6.5 target 3. Headline inflation (PCE)- 4q13 projection +1.1-1.2% vs 2.0 target 4. Core inflation (PCE)- 4q13 projection +1.2-1.3% vs 2.0 target [Previously & See also] […]

  5. […] 5y5y TIPS forward inflation breakevens (−): 5y5y at 2.42% remain at the low end of its post-crisis range, but it’s right around that 2.5% sweet spot for the Fed and floating higher since June’s lows […]


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