Mike O’Rourke of JonesTrading wales on the various Fed Heads and the Bank of Japan for having created a ridiculous situation where the entire market is just obsessed with every utterance from central bank chiefs, sucking away the oxygen from the real issues that should actually be driving markets.
He writes in this evening’s note that the events of the last two days are damning:
Earlier this month we highlighted comments Chairman Bernanke made a decade ago … “I worry about the effects on the long-run stability and efficiency of our financial system if the Fed attempts to substitute its judgments for those of the market. Such a regime would only increase the unhealthy tendency of investors to pay more attention to rumours about policymakers’ attitudes than to the economic fundamentals that by rights should determine the allocation of capital.” The events of the past two days (both here and in Japan) confirm this is the environment we are in. The situation has become so ridiculous that San Francisco Fed President John Williams had to assure the market that the Fed could increase purchases if the economy has weakened once tapering commenced. This stems from the Bullard application of QE – using QE in the same manner as the Fed Funds rate. Although the FOMC has adopted it, the Fed Chairman has done an awful job of communicating it. In any event, it is pathetic if the Fed needs to promise the next round of additional easing before the current easing has even slowed. It gives the impression that markets would simply be happier with a centrally planned economy. The reason that none of the FOMC members can give any inkling of when tapering will start is because they can’t quantify the benefits of it. In other words, they don’t know the effects of what they are doing, they just know they need to keep doing it.