Two Hawks?

Eyes around the world have turned to the Federal Reserve as their exit from Quantitative Easing (QE) has shaken markets. Each Fed member while able to espouse their own opinion is still part of a larger group at work. That is why when we listen to Fed members speak we also look to see the message of the group at large. For instance, when a member noted for their hawkish or dovish tones speaks it is usually offset by a speaker from the opposite camp in following days. We would point out that we heard two speakers this week. One hawk and one dove. The hawk came first by way of Richard Fisher of the Dallas Federal Reserve. Fisher is not backing down from his stance that QE must be wound down. Here is what he had to say by way of Arthur Cashin early this week.

 No Tapering The Tapering? – Dallas Fed President, Richard Fisher, was interviewed by Fox after the NYSE closed.  Here’s what MarketWatch heard:

 Fed’s Fisher sees no reason to slow bond taper

 WASHINGTON (MarketWatch) – Dallas Federal Reserve President Richard Fisher said he thinks the central bank should continue to reduce bond purchases despite falling U.S. stock prices and currency turmoil in overseas economies. In an interview on Fox Business, Fisher on Monday said the Federal Reserve is focused on how the “real” economy is doing and not just the stock market. So long as the economy shows progress, he said, the Fed should cut bond purchases from the current rate of $65 billion a month. Fisher pointed out that stock prices are still sharply higher compared to one year ago and he noted that markets are occasionally prone to sharp gyrations regardless of the health of the economy. Fisher is a voting member this year of the Fed’s policy-setting committee.

 His comments were to be offset by noted dove Chicago Federal Reserve president Charles Evans. Evans chose to emphasize that inflation was low and policy would remain accommodative for some time. He went on to say that inflation and not unemployment was the new bogey. Interestingly, he backed Fisher on the continued tapering of QE.

DETROIT–Chicago Federal Reserve President Charles Evans said Tuesday he is concerned inflation is still below the central bank’s 2% target.

The Fed has indicated it will maintain low rates until unemployment reaches 6.5%, but Mr. Evans said the inflation rate will be a factor in the central bank’s decision on when to raise the federal funds rate. The federal funds rate will stay at zero into 2015, he said.

“As long as inflation is below our 2% objective we can continue to have highly accommodative policy,” Mr. Evans told reporters following a speech to the Detroit Economic Club. “The inflation data is going to continue to be a puzzle.”

Mr. Evans said he sees no evidence of pressure to raise wages. Businesses “are getting by with who they’ve got right now.”

He also defended the pace of the Fed’s tapering of its asset purchases, and said it would be a “high hurdle” to change the $10 billion-a-month reductions over the next several months.

“It’s the right time and approach to moderately reduce our asset purchase pace,” Mr. Evans said.

Noting the recent upheaval in some emerging markets, he said that the Fed made clear in advance that it would be unwinding its quantitative easing, and that this shouldn’t have been “a big surprise” to investors. – WSJ 2/4/14

If that wasn’t enough it seems as though the authorities in China are ending the liquidity game and taking their ball home too. From Bloomberg comes an article this week that outlines China’s issues with shadow banking and liquidity fueled growth there. In an effort to get things under control and prevent a rapid melt down China is willing to withstand further volatility.

China’s central bank said reasonable volatility in money-market interest rates must be tolerated as it manages liquidity in the country’s financial system to rein in credit growth.

China’s benchmark repurchase rate surged to a record in June after the central bank refrained from addressing a cash crunch in the interbank market as it cracked down on shadow finance. The PBOC said today that while it will use tools including the reserve-requirement ratio and short-term lending facilities to ensure “appropriate liquidity,” it won’t bankroll a growth model that relies on investment and debt. – Bloomberg

It looks like the Tapering of liquidity is here to stay and so is volatility. Any hopes that the Fed might be swayed by other central banks, emerging market tremors or stock market volatility can be put to bed. 2014 is off to a rocky start and that will probably continue.

 Well, we did not get our Game Set MATCH as per Tom DeMark as the week ended higher. It’s back to the drawing board for Tom. We did get our oversold bounce although it did look in doubt Wednesday as the bulls seemed quite timid. More volatility to come as Central Banks have green lighted volatility in order to get liquidity back under control.

 To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

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