Policy Bound

Relax, said the night man
We are programmed to receive
You can check out anytime you like
But you can never leave
--Eagles

By now, it should be clear to any objective observer that the Fed cannot raise rates. And that markets know it.

For the better part of a decade, the Fed, while occasionally voicing hawkish rhetoric, has been nothing but dovish in action. Rates have been near the zero bound since 2007. The Fed knows that its policies have provided little positive influence on real economic activity.

But it keeps the pedal to the medal anyway.

Markets have levered up on cheap Fed funds and bid security prices to the moon. Even a tiny increase in borrowing rates will bring this leveraged house of cards down. Thus, markets buy all (bad) news that would keep rates suppressed, and sell all (good) news that would motivate central banks to raise rates.

We are too big to fail, markets are saying. Keep credit easy, lest we will collapse and make you look bad.

Central banks, ever image conscious, comply like indentured servants.