IT'S ABOUT THE SLACK

Forget the cat. It's now about the slack.

Most are familiar with the old saying about the cat being out of the bag. With the Fed's two-day FOMC meeting starting today, the real question on many minds is: How much slack is still in the bag?

Up to now Fed policy has been slow and steady as you go. Growth in the U.S. has picked up, according to many watchers, notwithstanding claims that inflation remains below the Fed's target rate of two percent. 

Wage pressures also remain low by some accounts. But others are saying that wages never receded enough during the The Great Recession to begin with and are thus starting from a level that won't take too much of a hike to pressure employers.

Stock market pundits near and far of course have rolled out their historical charts that show the market continues to rise during the first few Fed rate hikes, especially if those increases are orderly. But history buffs are like people, they come in all shapes and biases.

Today's Wall Street Journal "Ahead of The Tape" column quoted bond guru Jeffery Gundlach, saying "Yellen will be in no hurry to raise rates since U.S. economic growth is no stronger than in 2012." But  today's Financial Times noted in three previous occasions, 1994, 1999 and 2004, the Fed jumped on higher rates when conditions were less favorable than they are today, notwithstanding that each situation is different.

Confidence is a fragile thing. The longer the Fed waits to clearly signal what's on it's connect-the-dots mind, the greater the possibility investor confidence wanes. A Bank of America Merrill Lynch fund manager survey for September released earlier today cited the second quarter of next year as "48% expect the central bank to deliver its first rate hike then, up from 38% a month earlier" 

The end of the Fed's asset purchase gig, set to end next month, is actually a statement about declining slack left in the bag. Sitting atop a $4.4 trillion bond portfolio and after five years of  look-no-hands-zero interest rates, there's more than enough room for some unpleasant surprises. 
t. man hatter