The Moment The Fed Discovered Reflexivity
Back in September 2013, when the Fed was still debating whether to taper or not, caught in a vicious cycle where any hint it would ultimately end QE would be met with a prompt selloff, DB explained how it had found itself in such a reflexive morass:
Another theme arising from their decision to hold fire was their worry that financial conditions had tightened over the past few weeks. If this is the case then the path of tapering is going to be tough because every time the market thinks they are going to taper, yields will likely rise and conditions will tighten. However the Fed’s guidance is becoming confused enough now that you couldn’t rule out another change of emphasis, especially as the composition of the Fed will change notably over the next few months. So markets are underpinned by liquidity for now but it’s a fluid situation and it strikes me that the Fed do not have a clear direction at the moment which makes them difficult to second guess.
Three years later, the Fed finds itself in the same bind, eager – supposedly – to hike rates but very much unwilling to suffer the risk asset consequences this would entail, i.e., worried about a market selloff.
However, in today’s minutes, for the first time we observed a Fed that appears to have become self-aware, and has grasped just how reflexive the nature of its “communication strategy” with the market has been all along. To wit:
Well, better late than never.
And now that the Fed finally realizes the biggest hurdle in its “communication” with the market, namely that anything it tries to do will make it less likely to do it, we doubt it will actually do anything differently.
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