What, No “Yellen Put?” You Gotta be Kidding…


I do not believe it’s the Fed’s job to rescue reckless investors from the errors of their ways.” Now they tell us!

Some stock-hype artists said that the Fed can’t actually stop QE, ever, or that it would restart it at the first squiggle in the markets. They were almost right.

On October 15, when stocks were going to heck in a straight line, St. Louis Fed President James Bullard got on Bloomberg TV and pressed the red panic button. The profusely sweating souls on Wall Street had been clamoring for it. Markets could not be allowed to skid more than a couple of percentage points. Dip-buying had to be instantly rewarded. And they’d hold the Fed directly responsible if it didn’t get this mess straightened out pronto.

So Bullard said on TV that the end of QE should be delayed and that the Fed should continue buying $15 billion in securities a month. With that, he’d handed those profusely sweating souls what they’d been clamoring for. Or they thought he did. It was enough. Stocks instantly turned around and started re-soaring. The “Yellen Put” was born. It would kick in before stocks reached the 10% correction mark. Or so they dreamed. But Bullard was just jawboning the markets back from the brink.

It wasn’t what the Fed has been saying.

QE is buried. The only question that remains is ZIRP. It increasingly looks like Yellen wasn’t kidding when she warned lawmakers in July that, given a few ifs, interest rate hikes “likely would occur sooner and be more rapid than currently envisioned.”

This has been confirmed by other Fed governors, including Dallas Fed President Richard Fisher. In early August, after being asked why as a hawk he hadn’t dissented, he pointed out that the committee “is coming in my direction…. I feel comfortable with where the committee is going.” And the committee was getting more hawkish.

Now the doves are reduced to dissenting.

So on Monday, in his remarks before the Shadow Open Market Committee, Fisher was holding forth on QE’s rise and fall, now that the Fed balance sheet has ballooned to $4.5 trillion from $900 billion before it all started. So QE “seemed to succeed” in pushing down interest rates, goosing credit markets, and whipping stock markets into froth. “This came, of course, at the expense of savers,” he said. “But this was a cost that the committee felt was exceeded by the expected wealth effect.” Or more precisely:

For those with access to capital, it was a gift of free money to speculate with. (One wag – I believe it was me – quipped that there was, indeed, a “positive wealth effect… the wealthy were affected most positively.”)

But the effectiveness of QE3 had waned even as “current and potential future costs were mounting.” So he was “an enthusiastic supporter of killing” it. It hadn’t been used for productive purposes but for financial engineering “primarily to finance stock buybacks, increase dividends, and fatten cash reserves, and recently, finance mergers by the most creditworthy companies.”

The result is “an indiscriminate reach for yield, a revival of covenant-free lending, and an explosion of collateralized loan obligations (CLOs), pathologies that have proved harbingers of eventual financial turbulence.” Junk bonds were trading at historic lows. Risks that have been “propagated by QE3.” And then he added the ominous words:

“I do not believe it is the Fed’s job to rescue reckless investors from the errors of their ways.”

The Fed should, “in most circumstances, not directly concern itself with fluctuations in financial-asset prices,” he said. A “hearty” economy “can withstand reversions to the mean of junk bond or any other trading market and stock market corrections.” It did so before and can do it again.

For this reason, as we approached our deliberations at last week’s FOMC, I saw no reason for the Fed to react to the heightened volatility that occurred in mid-October and strongly advised my colleagues that we should be wary of any action we might take at the FOMC that would lead investors to assume there is a “Yellen Put” hidden in our pocket. For this would only encourage continued indiscriminate investing.

What, no “Yellen Put?”

Now you tell us!

The committee, as he’d already suggested in August, was moving in his direction: upon his insistence, the word “significant” was dropped from the description of the remaining labor-market slack; and language was added to show that the FOMC might raise rates “sooner than thus far assumed,” echoing Yellen’s words in July. These two “neutered,” as he said, the adjective “considerable” that was left in place to describe the time before rates would be raised.

And his insider take on Yellen? She’d wrongly been “pigeonholed as a dove,” he said. Instead, as chair of the FOMC has proven herself to be “neither dove nor hawk,” but “impressively balanced.”

This seems to be the new Fed: QE is buried; doves are reduced to dissenting; Yellen is itching to raise rates; hawks like Fisher are getting their policy objectives inked into the statement; and now even Wall Street’s sacrosanct assumption of a “Yellen Put” has been pooh-poohed by the Fed itself. Though that won’t preclude a Fed governor or two from trying to jawbone markets away from the brink – which may not always be as successful as Bullard’s effort was.

The bitter irony is that, after pushing desperate investors, from retirees to fund managers, way out toward the thin end of the risk limb, the Fed will just abandon them. It will be up to them to figure out how to hang on by their fingernails, or fall off.

The impact of the Fed’s policies since the financial crisis is now clear: for individual Americans, economic “growth” has meant the opposite. Read… That Shrinking Slice of a Barely Growing Pie: Why the Glorious Economy of Ours Feels so Crummy