Better late than never, Goldman Sachs points out that the treasury market is not reacting to the data. Apparently, the market also thinks that Fed policy has been largely driven by supporting the market. So the “market” only responds to this support market presumption about the Fed thus creating a diabolical and reflexive “circular reference.” This is classic moral hazard.
Is this moral hazard a massive delusional disorder or a psychosis — defined as strongly believing in things that are not real? Does the Fed in fact have the power to pin a delusional Ponzi scheme to the mat for a long period of time even if it wanted to? Might be something to hedge against.
Is it indeed delusional to ignore the following (see clues), or would it be delusional to pay attention to such pronouncements? Yes, we all know the Fed has no credibility, and is made up of dishonorable liars, but this also looks a lot like a Little Boy Who Cried Wolf set up. Might be something to hedge against as well.
Actually, there are increasing signs that the Fed may be focused on the market being too frothy, more so than economic data. That would be counter to the delusion that the Fed is only committed to keeping markets inflated. The opposite outcome that the Fed does not have the market’s back would be quite the wake up call.
Clues? Atlanta Fed President Dennis Lockhart said Tuesday he would not rule out an interest rate hike in September and that he was watching closely for signs of possible asset bubbles.
“At this point I don’t rule out a rate increase at the next meeting or later in the year,” Lockhart said in an interview on CNBC.
“I wouldn’t rule out as many as two hikes this year,” said Lockhart to reporters last week. Lockhart is usually portrayed as a centrist or the swing vote on the Fed.
Additionally Dallas Fed president Robert Kaplan and New York Fed president William Dudley warn that rate hikes are on the table. After these warnings and going into Friday morning’s job report, the FOMC market puts the odds of a Sept. 21 rate hike at 9%.
A pair of Federal Reserve officials, on separate visits to Asia, suggested overnight that the financial markets are too complacent about a September rate hike. However, investors back in the U.S. basically ignored the admonishments.
In a Bloomberg television interview from China, Dallas Fed President Rob Kaplan said a September rate hike ‘is very much on the table.’
New York Fed President William Dudley, in a speech in Indonesia, said he could definitely see the Fed raising interest rates even before the election.
‘The market doesn’t believe the Fed, it hasn’t been listening for a while,’ said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities, Inc. in New York.