Back in May, we first reported that Goldman became the first bank to dare to ask if the Fed has lost control of the market, if in slightly more polite terms of course. This is how Jan Hatzius phrased it: "Despite two rate hikes and indications of impending balance sheet runoff, financial conditions have continued to loosen in recent months. Our financial conditions index is now about 50bp below its November 2016 average and near the easiest levels of the past two years." Several months later, after the third rate hike, Goldman found that once again, paradoxically, financial conditions eased further, and the market rose even more in direct opposition of what Fed rate hikes are supposed to do!
Fast forward to this weekend, when we reported that that lovely word which describes the new normal so well - "paradox" - made a repeat appearance, this time in the last quarterly report by the Bank of International Settlement, which for the nth time issued an alert on the state of the stock market, an alert which will be summarily ignored by everyone until after the crash, and reminded everyone what happened the last time financial conditions eased instead of tightening when the Fed hiked rates (spoiler alert: biggest crash in modern history). This is what the BIS' chief economist Claudio Borio said (among other things)"
Fact - Outcome - Fed - Policy - Tightening
“In fact, this paradoxical outcome is not entirely new… it is reminiscent of the Fed policy tightening in the 2000s - the phase that spawned the now famous "Greenspan conundrum". Then, overall financial conditions hardly budged, and in some respects eased, as the Federal Reserve progressively raised rates. The experience contrasted sharply with previous tightenings, not least the one in 1994. At that time, long-term rates soared, the yield curve steepened, asset prices fell, corporate spreads widened,...
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