September 19, 2015

The Fed Is Trapped: The Naked Emperor's New "Reaction Function"

When China transitioned to a new currency regime last month, what should have been immediately apparent to everyone, was that the Fed was, from there on out, cornered. Boxed in. Trapped. Screwed. 
We reiterated this earlier today as the market still seems to be quite confused as to what exactly happened that caused Janet Yellen to resort to what many thought was the most unlikely option going into this week's meeting: the "dovish hold", or, as Deutsche Bank recently called it, the "clean relent."  
What follows is a recap of just how we got to this point or, in other words, an explanation of how the FOMC missed its opportunity and became trapped in the wake of China's move to devalue the yuan. Following the recap, we present excerpts from Citi's take on the Fed's "new reaction function. For those familiar with the backstory and/or who have a good grasp on why it is that the Fed went the route they did, feel free to skip straight to the section from Citi and the subsequent discussion.
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How did we get here?
Read full article at http://www.zerohedge.com/news/2015-09-18/fed-trapped-naked-emperors-new-reaction-function

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