Enough Already! Raise The Rate To 3 Percent

Enough Already! Raise The Rate To 3 Percent

Tyler Durden’s pictureSubmitted by Tyler Durden on 09/14/2015

Submitted by Calibrated Confidence

Enough Already! Raise The Rate To 3 Percent

Raise the Federal Funds Rate (FFR). Move the range to 0.25-0.50 percent and do it on a surprise announcement.  We should raise the rate to 3 percent overnight.  TV and all the pundits look at the same headline data and say the economy is strong.

The analysts have their confidence in their proclamations regarding the impact of raising rates according to the recent flood of equity specific “defensive” notes.  One economist who emailed Benzinga believes any increase in rates will benefit banks through the interest paid on reserves, provided the monetary bases keeps expanding, as the Fed typically sets the IOER paid on reserves to the upper-bound of the FFR.  Let us see how well the money managers have taken advantage of all this time to diversify and prepare for any impacts from a rate increase, whether detrimental to prices or beneficial to regional banks like popular opinion says (risk parity strategies be damned).

The 10-Year Real Rate has rebounded from negative territory and currently sits at 2.21 percent as of August, below the average of 2.40 percent since Jan 1962. Looks like the economy is saved following the brutal beating unleashed on the savers of this country in order to achieve balance in the universe by making sure GDP maintains 3 percent growth Y/Y, which it didn’t but don’t tell anyone.

Introduce a little anarchy. If the economy is so strong and everyone is so well prepared, then take the rate to 3 percent overnight. Why pretend to walk the FFR up in 25 bps increments for 18-24 months? The weakness in regional Fed District Economic Conditions Index 3-Month Average as reported in the most recent Beige Book does not appear to be impacting the future earnings expectation of the S&P 500 constituents as the index remains elevated since conditions declined beginning around Q4 2010:.

Take FFR to 3 Percent overnight.  Just do it!  What are you waiting for?  Yes you can, just do it!

Since data isn’t being analyzed in the proper perspective we can just say Net Interest Margins are growing, it’s all awesome, hike those rates and expand the monetary base and keep the QE alive for the banks (although it’ll be more subtle and we know how much the Fed likes to be subtle):


Everything is so wonderful that a rate hike would equate to saying the Fed has won. Seven years of ZIRP and a few selling periods when the Fed stopped POMO’s and QE injections, we can easily say with extreme confidence that the Fed won. And by won we mean didn’t ruin the system entirely. Except they did.

We still have elevated levels of people not working who want a job now and a skewed participation rate thanks to demographics in the US:


….our debt is at an unfathomable, unrepayable and national security threat level.


It’s all awesome again!  So much so that we should take the FFR to 3 percent overnight, not just 0.25-0.50 bps. Remember, everything is awesome again! Oh yeah, and everything is priced in according to the TV people so there’s nothing to even worry about right? Right. Wrong.  We’re repeating 2011 and we’ve wasted a year of price discovery now that we’re under 2014 levels for this same time last year.


Sector ETFs have broken down but that doesn’t mean the economy isn’t awesome. The only data that appears to be important this time around is Housing/Auto Sales and the Jobless Rate (Unemployment Rate).


Consumers who have heard from their evening news channels and regional newspapers that everything is so rosy have gone out and boosted expenditures while maintaining a flat savings rate (savings as a percent of disposable income).

People are consuming, oil is low, and, according to analysts, the recent selloff in equities has provided households with a windfall opportunity to buy companies well-positioned in sectors with strong-growth prospects and historically low EV/EBITDA multiples. Things are so fantastic right now that no one even cares about the Margin Debt levels and the fact that the borrowing of capital is being used to get long the market. For the sake of this piece we will ignore this and never focus here again because a 3 percent overnight hike in the FFR would have no impact here or anywhere else right?  No but let’s get back to the bullish story about sun-drenched fields and Unicorns on Rainbows.

The Buffett Indicator is a mere 2 Standard Deviations away from its mean and still below the peak in 2008, so clearly we are in a stable and rational economy given the percent of Corporate Earnings to GDP, everything is still awesome until we hit at least three Standard Deviations right?


This piece is meant to be tongue in cheek. The current state of global markets is unstable at best. The underlying fundamentals used to place value on assets are skewed and have become severely disconnected from the pricing mechanism. Recently Ray Dalio’s Risk Parity trading has been blamed for the market correction.  The strategy has been around since 2010 and blaming it for the current turmoil is dangerous mostly because it ignores China’s FX actions, the 19+ central bank interest rate cuts in Q1 2015, and the growth of equity-linked OTC Derivatives according to data from the Bank for International Settlements aside from the FX drama, Greece, and Australian “default”.

The seriousness attached to the speculation of a bounded range increase in FFR to 0.25-0.50 percent from 0.00-.0.25 percent is ridiculous. If the economy is so strong, as has been reiterated daily in newspapers and on TV, then 25bps should be nothing. If things are so great, let us go for 3 percent. The Swiss National Bank removed its 1.20 Euro peg and the Franc has retraced more than 78 percent of that initial move. Why can’t the Fed show some conviction and spike rates? Here’s to 3 percent FFR on amazing US economic strength!


If it truly is widely believed things are so awesome then take rates to 3 percent and get some ammo back in the Fed’s pocket because we’re going to need it when one of these unstable and overly indebted sovereign nations begins the next leg of the epic current war. Maybe then the CME can stop incentivizing the US Fed and global central banks to trade S&P 500 e-mini futures:

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