The Federal Reserve/FOMC Watch Journal

Discussion in 'Journals' started by Daal, Oct 8, 2008.

  1. Daal


    This journal will be used to follow the Fed/FOMC and the likely path of the federal funds rate. I want to make this journal very practical because so I will try to keep focused on trade ideas and how to profit from their decisions. Since this will be a trader oriented journal please no need to tell me that the Fed is a private corporation secretly run by Henry Kissinger, this won’t help me pay my bills

    I will be using mainly fed funds futures and perhaps bond and equity futures (maybe gold as well) to express trades to profit from their decisions.
    I’m no gambler so I will only take risk when I believe the risk reward ratio is there and my downside is protected, the trades I don’t put on as important as the ones I do.
    So far this year most of the profits I made were in fed futures, I don’t want this streak to get into my head and lead me to put a bad trade on so I’m patiently looking for the right spot right now.
    My current take on the fed stance is somewhat dovish but as they face reality they should get more dovish
  2. Daal

    The last FOMC meeting was an ‘adjustment meeting’. some parts of the FOMC Meeting Minutes:

    “Several participants had marked down their near-term outlook for economic activity and some judged that downside risks had increased, but most continued to expect a gradual recovery in 2009. Despite concern that recent high inflation readings suggested that price pressures could persist, participants generally thought that the outlook for inflation had improved, mainly reflecting the recent declines in the prices of oil and other commodities, the stronger foreign exchange value of the dollar, and the weakening of the labor market.”

    “Inflation risks appeared to have diminished in response to the declines in the prices of energy and other commodities, the recent strengthening of the dollar, and the outlook for somewhat greater economic slack, and Committee members were a bit more optimistic that inflation would moderate in coming quarters.”(this sounds like it was way more than just a person or two)

    “Some members emphasized that if intensifying financial strains led to a significant worsening of the growth outlook, a policy response could be required; however, such a response was not called for at this meeting.(because they don’t like to admit that they were wrong and be pushed around by the market expectation, the lesson is: central bankers are a lagging(non-coincident) indicator most of the time…ECB, Brazil CB hikes, Mexico CB hikes, FED ‘they know nothing’, there could exist a risk premium in fading expectations of quick change of central bank CURRENT policy rates stances, anyone with that knowledge and balls cleaned up on the Lehman’s BK FOMC meeting, anyone who believed trichet and faded the market expectations cleaned up as well this year)
    Indeed, it was noted that, with elevated inflation still a concern and growth expected to pick up next year if financial strains diminish, the Committee should also remain prepared to reverse the policy easing put in place over the past year in a timely fashion.”(this shows their constant ‘discomfort’ with the 2% rate)

    “The staff continued to expect that real GDP would advance slowly in the fourth quarter of 2008 and at a faster rate in 2009, but still less than that of its potential.”(I realize now that its important to monitor their silly forecasts because it helps explain some actions they take)
  3. Daal


    Bernanke speech

    “All told, economic activity is likely to be subdued during the remainder of this year and into next year. The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth.”

    “However, more recently, the prices of oil and other commodities, while remaining quite volatile, have fallen from their peaks, and prices of imports show signs of decelerating. In addition, expected inflation, as measured by consumer surveys and inflation-indexed Treasury securities, has held steady or eased”

    “In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate.”
    this is a interesting comment.
    If you recall, Bernanke changed the FOMC structure when he became chairman, Alan Greenspan was the first voter and that usually lead to the other voters to follow whatever he said, Bernanke choose to be the last voter to avoid that. If Bernanke wanted an ease after Lehman’s bankruptcy he couldn’t get one because he would have to dissent after everybody said ‘no change’, that would be madness.
    Here he seems to be somewhat trying to set the tone for the fomc meeting and lead them into thinking of easing, now they don’t have any excuses anymore, not just they have financial Armageddon happening they also have the Fed Chairman saying ‘boys we need to ease’. the only thing holding them back is that they are uncomfortable with the rate being so negative but even Fisher is saying inflation is no longer a big deal

    How can one make money out of this?
    The 1% fed funds futures trade seems to be back on, I’m not putting it on because the VIX is still high and I think I can get a better entry down the line, if equities soar fed futures will come crashing down, I’m going to have to be disciplined on the entry.
    Getting in now doesn’t seem to make much sense since some of the contracts are trying to price in .75 in easing

    The ‘fed low rate discomfort factor’ leads be to believe that it wont as easy money as I thought before
    If you look at the greenspan slash cycle back on 2001 to 2004. the bulk of the cuts happened from Jan 2001 at 6.5%(50 cut to 6%) to Dec 2001 landing at 1.75%, then the Fed held for a long time till they cut in Nov 2002 50bps, they held again to Jun 2003 and cut 25.

    My theory is that the American central bankers are leery when they get to very low levels and they feel they need to be pretty darn sure they are right before they swim any lower(this latest financial collpase might convince them), they like to think ‘lets just wait and see if we really need to do this’ ‘lets wait for more data, this current rate is quite low already’ 'lets do this or that solution instead of cuts'.

    The resistance in the last meeting(even though they mostly agreed things were awful), the no emergency cut on Monday(probably using the coming Commercial Paper Facility as an excuse) and the persistent hawkish tone of some fomc voters show that discomfort factor

    In the beginning of the year their panic button was the fed funds rate now it seems that they try everything possible(huge TAFs, liquidity facilities, AIG bailout, help on TARP, CP liquidity facility) before cutting the rate.

    This leads me to believe that being long the back months fed futures offer better value(and they trade at discounts to the fronts) because you get more meetings to be right. The drawback is that I can’t afford to be wrong on the US economy coming back, the employment situation and oil shocks up to the contract expiration
  4. Daal


    Global cut 50bps, this is very surprising given that Trichet said yesterday "no rate cut for now" and the FOMC was trying to do everything but a cut, fisher said few days ago that he did not think a cut was appropriate, today he voted for it!
    They kept trying EVERY solution before a cut and even then it was just .50, this leads me to believe that have the bias against very low policy rates. Now if the vix comes back to earth I can get back at fed futures, at these levels its just flat out insanity