Global Macro Commentary

Great Aunt Addy

Monday, August 18, 2014
Guy Haselmann
(212) 225-6686
Director, Capital Markets Strategy

John Zawada
Director, US Rate Sales



In Loving Memory of Dear Great Aunt Addy
Hear ye, hear ye, Fed policy is hereby bestowed the name Great Addy Policy in
memory of my great aunt who drove with one foot on the accelerator and one foot
on the brake. This is fitting since the FOMC is physically applying the brake by
ending its asset purchase program in October, while simultaneously blowing hot
air into the accelerator in the form of promises of continued accommodation.
Aunt Addy was unaware that operating the car in this manner would cause long
run damage. Had she known, she may not have cared: the car moved forward,
while it was being held back. At that current moment, she felt safer due to her
misguided belief that she had greater control of the car.
For those who went along for the ride on trips to the ice cream shop, it was a
terrifying and high-stakes adventure. Witnesses (the adults who stayed home)
deemed her effort to get to the destination, heroic. However, everyone knew that
over time the game of chicken dangers grew ever-greater.
Great Addy Policy will be evident this week. The Fed Minutes on Wednesday
will likely read a tad hawkishly, while Yellens J ackson Hole speech on Friday
morning will likely provide more dovish pleonastic gobbledygooked bunkum.
The Fed Minutes could read a tad hawkish, because economic data going into the
J uly FOMC meeting had been improving, and also because Charles Plosser
dissented. He felt including the words considerable period was inappropriate
because such language is time dependent and does not reflect the considerable
economic progress that has been made toward the Committees goals. Moreover,
although Richard Fisher did not dissent, he likely advanced and broadened
Plossers line of reasoning.
Yellens speech on Friday will likely discuss labor slack as a justification for uber-
accommodation. It will be evident that Yellen is a Tobin Keynesian and Galbraith
interventionist. Shell sound professorial and academic, but for Fed critics it will
do little to help them understand the logic behind the recent-year extraordinary
actions of the FOMC.
Critics will continue to point to the time-inconsistency (see J une 25 Commentary)
underlying their actions. Specifically, there are tradeoffs whereby slightly more
growth and employment today gets exchanged for significantly greater instability
and higher unemployment later.
The FOMC has used experimental tools for so long to keep the accelerator
pressed that it fears what happens when the car stops. Therefore, the FOMC
believes they have little choice other than to keep the car going forward, which
works until it doesnt. The risk/reward tradeoff continues to skew unfavorably.
The farther markets move into the right-tail side of the distribution curve, the
deeper they will eventually more into the left-tail. VrooomCrash.
The Galbraith-esque Fed believes it knows best. It believes that it has the authority
to keep spiking the punchbowl and that it has the knowledge to know when and
how to intervene in financial markets. It was easier for Aunt Addy to trudge down
the highway at a steady pace than it was for her to make turns or park the car.
Details of the Feds exit strategy loom in coming months. This week may offer a
glimpse of the Feds stop-and-start journey; one that is peppered with bouts of
confidence and the fear of not arriving at the proper destination fully intact - or at
all.
Beware; for I am fearless and therefore powerful Mary Shelley
FOMC Speeches





Key Events
J ackson Hole Aug 21
RBA Sep 2
ECB Sep 4
BoE Sep 4
BoJ Sep 4
FOMC Sep 17

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