Tuesday, August 18, 2015

Asymmetric risk

I know the TIPS market isn't the most liquid market, but this looks to me like its pretty stark signal that what markets are worried about is that the current estimate for Fed policy decisions will be disastrously deflationary.  And the implications of that will make themselves clear pretty quickly after the rate hike decision.

One way to interpret this is to disregard the TIPS market.  Another way to interpret this is that the question going forward isn't so much the trajectory of Fed policy rates, but the level of the natural rate.  How do we figure out what the natural rate is?  We watch the Fed do what they're going to do, and wait to see if all hell breaks loose.  This looks like insurance against hell breaking loose.  It's probably more expensive than we might expect it to be because the FOMC has a recent habit of disregarding the TIPS market and causing all hell to break loose.

Hat Tip: (Ed Bradford)


  1. OT...Zillow has report out showing rising ments

    1. Zillow seems to have reasonable analysis, from what I've seen.

      I googled and found a CNBC article on the Zillow rent report. Oh my god, the comments at CNBC articles make me want to stick my head in a meat grinder. You know, you and I like to complain about suboptimal monetary policies. And we certainly should. But, per Caplan's "Myth of the Rational Voter", thank god the policies don't reflect public opinion. There is so much ignorant cynicism out there. People who are really pissed off, and they know that the payment is due for something, but they don't know their asses from a hole in the ground. At places like CNBC that get the most viewers and reflect popular sentiment, the insanity is deafening. Policy could be a hell of a lot worse.

      Maybe some of this is a result of poor policies that have created suboptimal economic outcomes, leaving people angry, but people were complaining about bubbles 15 years ago. The Fed would have been pilloried if they hadn't pushed us into a recession.

      I don't know how we have managed to create and retain an open economy for so many generations.