There is a bevy of Fed speakers on deck today, all with a simple agenda of refuting last week’s historic move in Eurodollars which pushed forward fed fund rates negative as soon as November, to wit:
- BULLARD: NEGATIVE RATES NOT GOOD OPTION FOR U.S.
- KAPLAN: ‘I WOULD BE AGAINST NEGATIVE INTEREST RATES’
- KASHKARI: FED POLICYMAKERS HAVE BEEN ‘PRETTY UNANIMOUS’ IN OPPOSING NEGATIVE INTEREST RATES
Chicago Fed president Charles Evens put the issue to rest saying “at best, we’d have to study it more, but I don’t anticipate that being a tool we would be using in the US” confirming the Fed isn’t anticipating the use of negative rates (of course, the Fed wasn’t anticipating $7 trillion in QE just two months ago; in fact one can argue that anything the Fed agrees on – publicly – will be wrong).
And yet, just as one Fed president after another recoiled at the thought of NIRP , Trump just threw the Fed for a loop when he tweeted that “as long as other countries are receiving the benefits of Negative Rates, the USA should also accept the “GIFT”. Big numbers!”
We can only assume that the president is referring to the stock market reaction as the “big numbers” that NIRP would unleash, although Trump should probably check his assumptions: for an economy that is as financialized as the US, where almost 80% of all assets are financial and/or market-related and contingent on a properly functioning financial sector, negative rates would throw everything for a loop. Just see the banana continent that is Europe.
In any case, now that the debate has shifted squarely to if and when negative rates are coming, this discussion too has now been politicized, with the president taking the side of market speculators.
And while for now fed fund rates are trading solidly positive…
… this will probably not last, because as BMO’s Ian Lyngen writes, it is only a matter of time before the Fed is boxed in. Here is how he explains it in his latest letter to clients from this morning:
We hear from a variety of Fed speakers throughout the course of the day and while our base case assumption is for an on-message showing, there is undeniably still headline risk given the macro landscape. The open topics include yield curve caps, plans/limits for new liquidity programs and, of course, the potential for the Fed to venture into negative policy rate territory. Needless to say, we highly doubt that any of these questions will be definitively answered in the near-term, even if the futures market is suggesting ‘there’s a chance’ that rates drop below zero in 2021. The underlying logic is compelling; specifically that any second half bounce will be short-lived and the FOMC will be called upon to do more next year once the V-shaped recovery dream has failed to come to fruition. Precisely how significantly the economy slows in the wake of the initial bounce remains to be seen and will ultimately reveal the prudence of positioning for negative rates.
We’re highly skeptical Powell will set policy rates below zero. The argument that the Fed could allow the effective Fed funds rate to drift so close to the bottom of the range (risking <0) and not address it with an adjustment to IOER is also difficult to envision. Although the Committee’s reluctance to make the needed ‘fine tuning’ change heretofore is surely, on some level at least, contributing to the negative-rates hypothesis for 2021. The combination of today’s Fedspeak and Wednesday morning’s Powell webinar offers monetary policy officials an opportunity to pushback against the current pricing in the Fed funds futures market.
Here’s the punchline:
The most troubling aspect of the forward pricing for the Fed is the risk investors press the expectations so far as to effectively box the FOMC into either cutting further or triggering another repricing in domestic equities thereby tightening financial conditions.
This is the dynamic which makes it impossible for the Committee to entirely ignore and dismiss the present situation.
And now that the president has chimed in on behalf of negative rates, the Committee certainly can’t ignore and dismiss the present situation; it also means that it is only a matter of time before the PIRP (opposite of NIRP) vigilantes retest negative fed fund futures again, and the boxing of the Fed will begin as the only alternative for markets pricing in negative rates is to fall if and when Powell disappoints both them and the president.
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