Fed Post-Mortem: A Whole Bunch Of Nothing

“Capitalism can’t exist at these levels.”

That’s the take from (former) bond kind Bill Gross following Wednesday’s farce of a Fed “decision.”

The idea that this was a “live” meeting was of course a joke, strong June jobs print or no strong June jobs print. As we put it in a column published elsewhere, if Yellen had hiked at a no presser meeting, whatever human floor traders are left in today’s algo-dominated market would have rented a Winnebago, drove to Washington, and stormed the Eccles Building.

The reaction from the pundit penguin brigade was particularly telling. There was very little in the way of post-Fed coverage on CNBC. Even the normally cantankerous Rick Santelli pretty much just shrugged his shoulders. “They’re scared to death,” one guest remarked.

That’s an important point. They are “scared to death.” And that’s quite frankly absurd. Or maybe it isn’t. The FOMC, along with the ECB and the Bank of Japan, have created a world that quite literally can’t function without them. “Would the Dow collapse over 25 basis points?” one veteran CNBC anchor asked, incredulous. Yes, at this stage it would. And there’s no rhyme or reason why that should be the case.

Another 25 basis points is largely meaningless in terms of the cost of money. But it means a lot in terms of psychology. The problem is, no one, including the Fed, has any idea how another hike would be interpreted by the market. It’s like a one giant prisoner’s dilemma complicated by the fact that the prisoners are also the jailers.

As far as markets go, this was the reaction:

We’re not entirely sure that’s what they were going for considering the following language from the statement:

FED: JOB MKT STRENGTHENED, ECONOMY EXPANDING AT MODERATE RATE

FED SAYS `NEAR-TERM RISKS' TO ECONOMIC OUTLOOK HAVE DIMINISHED

But really, this was a whole bunch of nothing. And that was probably intentional. “They’re probably feeling chastened after a series of flip-flops” CIBC economist Avery Shenfeld remarked adding that “there’s nothing here that points to September.”

Then we got this from independent strategist Ian Lyngen:

“FOMC left door open for Chair Yellen to signal more at Jackson Hole conference in late August if next week’s jobs report gives her cover. Comments about labor market, payrolls are clearly an attempt to skew the softness in NFP as a one-off as the Fed looks toward the second half of the year.”

Right, so no one knows what’s going on - least of all the Fed. As Citi’s William Lee put it last week, “let’s meet to assess conditions but do nothing.”

That’s spot-on. There really wasn’t any point in even having this meeting, although if they really wanted to discuss something worth discussing, it wouldn’t be whether another 25 basis points is “appropriate,” it would be how to go about reversing a situation where the fate of the financial universe hinges on 25 basis points. Here’s what Bloomberg’s Richard Breslow had to say this morning:

“As we await today’s FOMC decision, I’ve been struck curious by how many people are speculating that the accompanying statement might lurch back hawkish. For a Fed that has had such notable lack of success seeing clarity in its crystal ball, that would be remarkably aggressive. The Fed worked too hard lobbying the market to expect a June hike which would precede more to come. They put a lot of credibility on the line. Only to be utterly blindsided by events. Will they be willing to go out on that same limb again? Game theory doesn’t suggest they’re about to get lucky.”

They tried - sort of. And it just didn’t matter. The hawkish bluff in late May seems to have been the last straw for markets when it comes to giving any credence whatsoever to the normalization myth.  No one is buying it any more. Well, almost no one. Here’s Goldman:

“We modestly raised our subjective odds of a rate hike at the September FOMC meeting to 30% from 25% previously.”

How one goes about “subjectively” raising a quantitative assessment is beyond us, but we would humbly and “subjectively” suggest that the odds of a Fed hike any time in the foreseeable future are slim to none.