When experts in the MSM get all the soundbites and all the eyeballs, it should be no wonder why the Fed and the government are so disconnected from reality…
First off, it’s a “beautiful” thing the Fed is doin’ there:
— Mohamed A. El-Erian (@elerianm) September 20, 2017
Here’s why. From his Bloomberg article:
The Federal Reserve on Wednesday is expected to provide details on the implementation of the next step in what so far has been an orderly gradual multiyear normalization of unconventional policies, a process that has confounded many who saw the May 2013 “taper tantrum” as a precursor to the unsettling volatility to come. Here is how to think about the what and the why, and their potential implications for what’s ahead.At the end of its two-day Open Market Committee meeting, the Fed is likely to provide operational specifics on the measured and conditional reduction of its $4.5 trillion balance sheet — namely, the timetable for the roll-off of its holdings of Treasury and mortgage securities. Officials aren’t likely to signal major revisions to their interest rate forecast (the blue dots). Specifically, they will refrain from meaningfully validating what currently is too low a market probability of a hike in the remainder of the year. That policy guidance is more likely to come later.Investors and traders are sanguine about the initiation of the balance-sheet reduction, having already navigated in an orderly fashion the termination of the Fed’s program of large-scale security purchases and three rate hikes. As an illustration, the VIX — a widely followed indicator of market volatility commonly called the “fear index” — was trading down at 10.15 on the eve of this week’s FOMC meeting, after fluctuating in a range of 8.84 to 23.01 in the last 12 months.
Several factors are contributing to this notable market calm. The global economy is in the midst of a synchronized growth pickup, though it is far from impressive and below what it is capable of (and needs). Judging from remarks of Fed officials, the central bank remains keen to avoid market disruptions. Meanwhile, the European Central Bank and the Bank of Japan continue with their large purchases of market securities.All this serves to fuel the adaptive expectation process that has created high market confidence that central bankers are able and willing to deliver a “beautiful normalization” — to adapt a phrase coined in another deleveraging context by Ray Dalio, the founder of the hedge fund Bridgewater — starting with the Fed, the world’s most powerful and influential monetary institution. That is, they will manage a slow and orderly exit from unconventional measures that neither derails economic growth nor causes financial instability.