FAST FIVE: Fed "Begins To Split" On Rate Hikes As "Chaotic Market Breakdown" Looms
Failure to do so raises the risk of credit market dysfunction, which, if occurred, would be difficult to contain and fix.
That's what Charlie Gasparino reported yesterady when he tweeted that, according to several big investors, “federal reserve officials getting increasingly worried about “financial stability” as opposed to inflation as higher rates begin to crush bonds.” Gasparino continued that the Fed was growing “worried about possible “Lehman Moment” with a 4% FF rate as Bonds and derivatives tied to them crash, given the enormous debt issued in just the past 3 years at super low rates.
To be sure, the costs to the economy have already been telegraphed in the form of falling asset prices with the S&P 500 plunging 9.3% in September – the worst September since 2008 – as markets have now lost over $10 trillion from the all time high.
“I don't think they really understand” the risk of chaotic market breakdowns, she added.
“When you say we are hellbent on being the fastest car on the road, that encourages a lot of positioning that is one way.” And speaking of chaotic market breakdowns, it is not just the credit market that is on the edge: according to another former NY Fed staffer, and current rates strategist at Bank of America, Mark Cabana who on Friday wrote a must read note (available to pro subscribers), in which he warned that Treasury “market functioning breakdown is a growing risk & may see long-end duration sell-off + curve bear steepen.