the Fed’s Parabox

per Bloomberg‘s Sara Eisen’s Tweet Goldman’s Jan Hatzius is forecasting the Fed will launch a “sterilized” QE 3 in the second quarter.  This is not surprise and should be take seriously by market participants because Jan’s former boss is NY Fed’s Bill Dudley one of the more powerful and outspoken doves on the Fed.  Jan is also who has called for a controversial targeting of nominal GDP to close the output gap.

We have long believed the Fed by targeting low long term interest rates to spur economic and more importantly housing activity has put themselves in the paradoxical box of actually preferring weak economic growth because it makes their job of holding rates down much easier.  With this week’s bond market massacre the Fed must be concerned stronger growth and a stronger stock market could unwind their QE bubble of fear.

if they do launch another round of QE and especially if they sterilize it, they will be admitting they are causing inflation (otherwise no reason to sterilize) and are trying to keep interest rates abnormally low despite a pick up in economic activity.  This week is a perfect example of why the Fed can’t control the long end of the curve and further attempts to do so in the face of stronger economic growth will only lead to a massive fear bubble unwind down the road.   You think they are repressing savers now, wait until their 2% coupons trade at 5% yields..


About exantefactor

capital market veteran of over 15 years covering multiple asset classes. Focused on analyzying markets ex ante (before the event).
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