Saturday, September 22, 2012

The hawks fight back

When the Fed launched QE3, Tim Duy recently wrote that the hawks on the FOMC have been marginalized by Ben Bernanke:
The hawks are all bark, no bite. They are more than overwhelmed by dovish-leaning policymakers, even if Bullard joins Kansas City Federal Reserve President Esther George in hawkish dissent. What remains important heading into 2013 (aside from the data, of course), is Federal Reserve Chairman Ben Bernanke. He can pull the moderates where he wants to go. And it obviously is not in a hawkish direction.


Bottom Line: Fed hawks are largely marginalized. Their views have not and will not have a significant impact on policy making. They will only appear to have an impact on policy if the data signals that a policy shift is needed. Given the current set of policymakers on the Fed, the hawks will only have a voice if Bernanke is replaced with one of their own. And that is when it would get interesting, as I am not sure that the moderates would follow a hawkish Chairman.
That view is only true if an analyst were to think in a linear fashion. Marketwatch reports that Dallas Fed's Fisher is leading the charge to change the Federal Reserve's dual mandate to a single price stability mandate:
Two top Federal Reserve officials who opposed the latest round of Fed asset purchases have waded into tricky political waters by suggesting that lawmakers could tie the Fed’s hands if they wanted to block more asset purchases.


“A future Congress might restrict us to a single mandate – like other central banks in the world operate under – focused solely on price stability,” said Richard Fisher, the president of the Dallas Federal Reserve Bank in a speech on Wednesday night in New York.

Earlier in the week, another regional Fed bank president, James Bullard of St. Louis, was even stronger, saying he supported restricting the dual mandate to a single inflation-fighting goal.
It seems that the hawks are upset enough to risk open warfare at the Federal Reserve and they have enlisted the Republicans in Congress as allies:
With the base of the Republican Party this year very anti-Fed, a Romney victory in November would likely spark efforts to limit the Fed’s powers in monetary policy and banking regulation, experts said.

“Many Congressional Republicans seem eager to tie the Fed’s hands and Bullard is playing into that,” said Joseph Gagnon, a former Fed staffer and now a senior fellow at the Peterson Institute for International Economics.

House Republicans have already introduced legislation to end the Fed’s dual mandate and vice-presidential nominee Paul Ryan has been advocating the measure in recent campaign appearances.

Rep. Kevin Brady, a Republican from Texas and a sponsor of one of the bills to limit the Fed’s focus to inflation, has said that the Fed would not have been able to launch its latest QE3 plan if his legislation had been enacted.

Buba's counterattack
Across the pond, the Bundesbank's Jens Weidmann was publicly making parallels of the ECB's actions to Goethe’s Faust:
In early scenes from Goethe’s tragedy, Mephistopheles persuades the heavily indebted Holy Roman Emperor to print paper money – notionally backed by gold that had not yet been mined – to solve an economic crisis, with initially happy results until more and more money is printed and rampant inflation ensues.

What is Weidmann playing at? Is this a last ditch offensive to forestall OMT? Is this Weidmann's Unternehmen Wacht am Rhein?

Should bulls be worried?

My inner trader tells me that I shouldn't be concerned about the hawks until 2013. In the case of Weidmann, he may be trying to influence the German elections that occur about a year from now in 2013. In the US, the response of the hawkish contingent within the Fed is certainly disturbing, but give Romney's poor electoral chances as shown by intrade, they are likely angling for one of their own as the new Fed Chair when he is appointed in January 2014 (but the fight will happen in 2013).

I wrote these words on Monday and I stand by them (see Watching for storm clouds on the horizon):
In the meantime, both the Fed and ECB are hosting a gigantic block party. There's lots of free food and drinks. I am sure that even the Chinese will be there. Go on and enjoy yourself. Just don't get so drunk that you get caught flat-footed when the cops raid the place.
As my inner trader tells me, "Don't worry, be happy!"


Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

1 comment:

Anonymous said...

I'm actually on the other side this time around. Too many people are in the *free* money trade with this round of QE. The *me too* crowd has joined and positioning is extreme bullish if you look at the indicators here:

http://2.bp.blogspot.com/-cMEfMikdzlE/UEsE0SzPkiI/AAAAAAAALI0/sXZhS0rMcD0/s1600/Rydex+Cash+Levels.png

http://4.bp.blogspot.com/-qzTd_MPpX3s/UFGkD2isJrI/AAAAAAAALds/ZOqzuApsgXI/s1600/AAII+Asset+Allocation.png

http://3.bp.blogspot.com/-qkjekH0eZrY/UEsC1FDOSuI/AAAAAAAALIs/_WTUejzneJc/s1600/Retail+Money+Markets.png

http://3.bp.blogspot.com/-kPfN8xrNdqk/UEsOMzy_egI/AAAAAAAALL8/hwk1VhXm0SQ/s1600/Volatility+Index.png

Markets tend to go in the direction of breaking conventional wisdom. Maximum pain is down this time around since everyone is on board enjoying the long party.